Brookfield Asset Management, which is perhaps the best asset manager in Canada, has an interesting strategy when it comes to its real estate portfolio.
The majority of its assets are what you’d expect. They’re high-quality buildings located in the downtown core of major cities — locations that can’t be beat. After all, as the old mantra goes, real estate is all about location, location, location.
But the company also owns a significant amount of what it calls distressed real estate. These are assets that the market doesn’t love for whatever reason, but still have solid cash flows. They end up making money two ways — first collecting the rent and then selling the property for a profit later.
I believe individual investors can borrow such an attitude for their own portfolio. The key is to buy good real estate assets when they’re depressed, collect the yield until the underlying stock recovers, and then move onto the next one. Brookfield targets a 15-20% annual return with this strategy — something I think is very possible if you’re a savvy investor.
Let’s take a closer look at three dirt-cheap real estate stocks that would fit this strategy nicely.
Invesque (TSX:IVQ) owns income-producing medical real estate in the United States, with a few properties in Canada. The 124-property portfolio includes medical office buildings, skilled nursing facilities, and seniors housing facilities. In total, the company owns close to US$2 billion worth of property.
The company doesn’t operate any of its facilities; they’re all leased out to operating companies that take all that risk. These leases also have rent escalators built in, which ensures steady top-line growth. Management have also shown us they’re skillful acquirers, putting a significant amount of capital to work since the stock’s IPO just a few years ago.
Invesque shares are quite cheap, trading at just over seven times 2020’s projected funds from operations. The stock also trades right around book value, while most of its peers trade for a premium to book. And, perhaps most importantly, the company’s 11.1% dividend appears to be well covered, with a payout ratio in the 75-80% range.
Slate Office REIT
Slate Office REIT (TSX:SOT.UN) did the unthinkable in 2019 and slashed its dividend. Because of this, many investors are avoiding the stock, afraid the payout will be slashed again. But once we dig a little deeper, an interesting opportunity emerges.
The company’s portfolio consists of 37 different office buildings, spanning 7.1 million square feet of gross leasable area. The portfolio is spread out across Canada, and it owns a couple of properties in Chicago. Slate takes a value investing approach to real estate, pledging to buy unwanted assets for less than their replacement costs.
No matter how you slice it, Slate Office shares are really cheap. The firm will earn approximately $0.76 per share in funds from operations in 2019, while the stock trades below $6 per share. That puts the stock at just 7.8 times funds from operations. It also trades at 35% below its net asset value.
Finally, Slate Office REIT’s new 6.8% dividend is quite sustainable, checking in with a payout ratio of about half funds from operations.
Morguard (TSX:MRC) is another dirt-cheap real estate stock that trades at a low price-to-book value ratio. It trades for just over $200 per share, despite having a net asset value of more than $310 per share.
One of the reasons for this is because Morguard doesn’t pay out a dividend. CEO and Chairman K Rai Sahi prefers to reinvest the cash flow, creating a pretty compelling opportunity for investors who don’t like to pay any taxes. You can buy today and patiently hold for a long time. The strategy is obviously working pretty well for him; his position in Morguard alone is worth well over $1 billion.
Morguard is also cheap on a price-to-funds from operations perspective, trading at under 10 times 2019’s funds from operations.
Unlike some of the other stocks listed, which have destroyed shareholder value over the medium term, Morguard has consistently grown the business. So, investors have two options — they can flip shares when they get a nice gain, or they can buy and hold this one for a long time.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith owns shares of Slate Office REIT. The Motley Fool recommends BROOKFIELD ASSET MANAGEMENT INC. CL.A LV.