Passive income investors have been given a rare opportunity to capitalize on various real estate investment trusts (REITs) while they’re down and out while their yields are still miles above that of their historical averages.
The COVID-19 crisis hit the REITs very hard; some, like those in the office and retail real estate sub-industries, more than others. Although the yields have swollen to seemingly unsustainably high levels, I still think income investors willing to put in the homework have a shot to lock-in a swollen yield alongside potentially outsized capital gains in an upside correction as the world inches closer to pre-pandemic normalcy.
REITs are about to become great again
You’ve probably heard all the negative headlines surrounding REITs, the inability of tenants to make rent, rent deferrals, pressured payouts, distribution reductions, deterioration of property values, and all the sort. Some of the more bearish pieces out there may claim that various real estate sub-industries will never come back or that it’ll be a prolonged road to recovery following the COVID-19 crisis.
While we have witnessed a profound shift from physical to digital, I think it’s a tad far-fetched to think that office space, shopping malls, or inner-city apartment buildings won’t witness some sort of reversion to their pre-pandemic means after COVID-19 is finally conquered. Zoom video and various other incredible technologies that have accelerated the digitization of work are the real deal. But let’s be real for a moment.
Such e-commerce and work-from-home technologies have been causing a shift towards digitization for quite some time now. Once it’s safe to venture back into the realm of the physical again, we’ll see a majority of workforces heading back to the office, with some shoppers who haven’t yet been hooked on e-commerce returning to their local mall because of the underappreciated social factor that we’ve all been longing for amid recent shut-ins and lockdowns.
While I do see some reversion in mean demand in office and retail space, I don’t think a complete reversion will be witnessed anytime soon, as the coronavirus pandemic has likely caused some folks to make the permanent shift to home-based work and shopping. Regardless, any modest reversion in mean demand for office, retail, and inner-city real estate is likely to move the needle substantially in many of today’s REITs that are still battered.
A Smart REIT for smart passive income investors
With a 90% effective vaccine that’s pointing to a potential end to this pandemic next year, passive-income investors have the green light to scoop up shares of battered REITs like SmartCentres REIT (TSX:SRU.UN) while they’re still relatively undervalued given the more promising trajectory that lies beyond 2020.
Ever since SmartCentres fell off a cliff, I’ve been buying shares, as I thought the “death of the shopping mall” thesis was overblown beyond proportion. SmartCentres was also a king among men in the retail REIT space, with an anchor like Wal-Mart at most of its stores and high-quality essential retailers that I didn’t see in a spot to miss a month’s rent, regardless of how bad things got with the pandemic.
SmartCentres had a yield north of 9%. After Monday’s vaccine breakthrough, shares of SRU.UN popped nearly 17% in a day, causing the yield to compress below 7.7%. With a return to normalcy now in sight, SmartCentres is still a buy before shares correct back to the mid-$30 levels and the yield back below the 6% range.
Foolish takeaway for passive-income investors
Passive income investors waiting for a pullback may be left behind, as the vaccine, I believe, is likely to cause a continued rotation into the battered COVID-19 stocks well before the vaccine has a chance to be administered to the masses.
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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 owns shares of Smart REIT. The Motley Fool recommends Smart REIT.