Real estate stocks with big exposure to retail properties took a big hit from COVID-19 disruptions.
Here are two examples.
STORE Capital: Dividend Stock Yielding 5.6%
STORE Capital (NYSE:STOR) fell as much as 65% from last year’s high. Then, the dividend stock developed a base in the $16-18 range for about three months before appreciating approximately 46%.
Source: Stockcharts with author annotation
It still offers a nice yield of 5.6%. And it still trades at a discount of about 20% from its normalized valuation. However, it’s meeting short-term resistance right now at about $26. The price action in the next two weeks will tell us if it’ll break above it or not.
The commercial real estate company has a diversified portfolio consisting of 2,552 properties across 49 states and 491 customers who operate across 113 industries.
You can still apply for Canada Revenue Agency’s (CRA) Canada Emergency Response Benefit (CERB) to get $2,000 a month if you haven’t already. However, eventually, the benefits will come to an end and there’s no guarantee that work will be readily available when the COVID-19 crisis ends.
Here’s how you can get $2,000 (or more) per month permanently.
Unless you think brick-and-mortar retailers and offices are dead, now is a great time to buy depressed real estate investment trusts (REITs) in these sectors because of the COVID-19 impacts.
For example, during this COVID-19 pandemic, I bought positions in Brookfield Property Partners (TSX:BPY.UN)(NASDAQ:BPY) / Brookfield Property REIT (NASDAQ:BPYU), H&R REIT (TSX:HR.UN), SmartCentres REIT (TSX:SRU.UN), and STORE Capital Corp (NYSE:STOR).
Near-term Risk Exists in REITs, As Does Long-term Opportunity!
Don’t get me wrong. In the near term, there’s indeed high risk. These REITs that have large retail or office exposure can continue to be depressed and slash their dividends.
H&R REIT only collected 50% of its retail rents but 80% of its total rents in May. Enclosed malls are doing the worst during the pandemic as other than essential services tenants like grocery stores, others had to be shut down at one point or another to keep the public safe.
In April, I suspected that H&R REIT could cut its cash distribution in half. And in fact, it cut its cash distribution by 50% in May. That said, the stock still offers a nice yield of 7.1% at CAD$9.70 per unit.
Source: F.A.S.T. Graphs with author annotation
I still believe H&R REIT can trade at CAD$19 per share in the future. That’s almost a double! As well, it’ll be able to restore its cash distribution to higher levels in a normalized market. Meanwhile, buyers today get paid a handsome passive income to wait.
Happy Halloween! Stocks can be beaten down by the market — sometimes it makes sense but other times it’s outright irrational! Which is a trick? Which is a treat?
Treat: A&W yields 5.1%
As the name suggests, A&W Revenue Royalties Income Fund (TSX:AW.UN) collects royalties. Specifically, it collects 3% of sales from the 973 A&W locations across Canada. In the trailing 12 months (TTM), it had CAD$0 of capital spending.
Yes, you read that right. A&W didn’t have to pay a cent to maintain its cash flow generation of CAD$34 million. It’s such a small company that many funds ignore A&W, which makes it all the merrier for retail investors like you and me.
A&W is a franchise. Qualified franchisees pay a minimum of CAD$250,000-350,000 to start their restaurants using A&W’s proven business model and having its support. A&W wants its franchisees to succeed because their success goes straight to A&W’s bottom line.
A&W’s recent weighted average interest rate was less than 3.6%, which suggests it’s a low risk investment. The company’s TTM free cash flow payout ratio was about 90%. So, income investors can trust its monthly cash distribution.
Moreover, A&W’s recent stock price decline of almost 20% from $46 to $37 is purely multiples compression from a high valuation to a decent valuation. And I believe it’s a Halloween treat to be able to accumulate the units at the current valuation.
