The REIT scene has been decimated by the insidious coronavirus crisis, especially those in the office and retail real estate sub-industries. Many work forces have opted to work from home, and many shoppers have embraced digital e-commerce platforms as well as convenient delivery services.
Even after this pandemic ends and it’s safe to go outside without running the risk of contracting COVID-19, many firms may not be mandating a return to the office. Some firms may keep their work forces at home, cancel their future leases, and pocket the savings.
And on the retail side, many tech-unsavvy consumers have discovered how to order stuff online or get their groceries delivered to them with the slew of intuitive apps that are becoming cheaper and easier to use by the day. Many folks who are growing accustomed to ordering online won’t be going to shopping malls or retail outlets nearly as much as they used to.
Is this an opportunity of a lifetime to pay less for more yield?
Right now, the popular thesis on Bay and Wall Street is that the demand for office and retail space has taken a permanent hit as a result of the COVID-19 crisis. But what if the bears are wrong? What if we see some reversion to the mean demand for such real estate once the coronavirus is mostly eliminated? Then high-yield retail REITs like SmartCentres REIT (TSX:SRU.UN) and office REITs like Inovalis REIT (TSX:INO.UN) could prove to be severely undervalued.
As a contrarian, you need to formulate your own thesis. If you think that in three, five, or 10 years that people will be back to the normal routine of going to malls after a long day at the office, then both SmartCentres and Inovalis are nothing short of steals, as they continue to hover around in limbo following the unprecedented coronavirus-induced collapse in their respective share prices.
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Sporting a 9.2% yield, SmartCentres REIT shares reek of value; they’re down nearly 50% from all-time highs. The retail-focused REIT has fallen under pressure, but I think it’s exaggerated beyond proportion. Why?
Nearly a third of SmartCentre’s tenant base is considered providers of essential goods and services. Even if another round of government-mandated shutdowns were to land in fall, the REIT is still in a spot to keep its cash flows far more resilient than most other retail REITs out there. SmartCentres drew down $460 million of its revolving operating facility back in March. And while the distribution is stretched, it will likely remain intact, as the country inches closer back to normalcy.
Of course, there will be bumps in the road, as local geographies reopen their economies in slow and steady phases. But as a resilient REIT with rock-solid, long-term fundamentals, I’d say shares could find themselves correcting to the upside, potentially by year end, should we be in for the advent of a vaccine in the fourth quarter.
With a massive 10.6% yield, Inovalis REIT is a passive-income investment that’s largely underrated by the income oriented. The yield may be ridiculously high, but unlike securities with similarly sized yields, no distribution reduction is imminent. Why?
Inovalis’s yield is ridiculously high by design. Under a normal market environment, the REIT has sported a yield near 8%. The high yield is sustainable at these levels, but it all comes at the expense of capital gains potential, as Inovalis has barely budged over the years prior to the coronavirus crash.
Now that European office-focused REIT Inovalis has fallen into a rut, I see an opportunity for contrarians to pay less to get more (yield). The monster 10.6% yield likely isn’t going anywhere, anytime soon, as management has noted that it faced “near-normal rent collection” in Q2, which included some of the worst parts of the coronavirus crisis.
If you’re looking for a European property outlet and a high but safe distribution, look no further than Inovalis while its shares are depressed, because I have a feeling they won’t remain at these depths for a prolonged period.
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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 Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Inovalis REIT and Smart REIT.