Based on the recent stock market rally, you might think we’re right back to where we were before the novel coronavirus outbreak. That may be the case in some sectors, but it certainly isn’t the case in the commercial real estate market. According to Green Street Advisor’s commercial property price index, commercial real estate prices are down 11% year-to-date.
Lower prices don’t necessarily mean you should avoid the sector entirely, though. In fact, three commercial real estate stocks -- Howard Hughes Corporation (NYSE: HHC), Brookfield Property Partners (NYSE: BPY), and Vail Resorts (NYSE: MTN) -- look like compelling investments. Let’s take a look at why investors might want to consider picking up shares this month.
Why invest in commercial real estate stocks anyways?
Investing in stocks to get exposure to commercial real estate sounds a bit counterintuitive. After all, a large aspect of real estate investing is to diversify one's portfolio into multiple asset classes. Stocks are generally owned for price appreciation, while property generates passive income and tax advantages.
The challenge for individual investors, though, is that commercial real estate investing requires lots of capital to make a direct investment. There are thousands of investors out there who would love to get exposure to this asset class but simply don't have that kind of capital. An alternative way to make a commercial real estate investment effectively is through commercial real estate stocks. Many commercial real estate companies on the stock market can provide the cash flow and dividend income that commercial real estate investors are looking for.
So before writing off stocks as a way to get exposure to the commercial real estate market, consider these three investment opportunities.
One caveat: These picks are not real estate investment trusts (REITs). A REIT is a unique corporate structure that benefits from certain tax rules if it returns the vast majority of its taxable income to investors. While some of these companies share the traits of a REIT, they aren't structured as such.
Howard Hughes Corporation
There is one phrase in Howard Hughes Corporation’s investor presentations that succinctly expresses the investment thesis in this company: "monopoly-like control." The company is best described as a full-cycle developer that focuses on master-planned communities (MPCs). MPCs involve buying up massive tracts of land and creating small cities from the ground up. It is a truly unique business model, as the company generates returns from multiple sources on a single tract: Selling subdivisions to homebuilders; developing, owning, and generating rental income from commercial property; and then realizing price appreciation on remaining land it can sell to residential real estate developers.
In many ways, Howard Hughes Corporation is like a real estate investment trust, but the management elects to remain a regular company so it isn’t legally required to pay dividends. That way, it can retain cash to reinvest in development versus taking on high debt loads or issuing shares. After all, it's building small cities from the ground up.
Howard Hughes’ stock hasn’t done much for investors since it went public in 2011, and many would likely be frustrated with the performance. With such massive land and property holdings, though, and the ability to develop these properties for decades, Howard Hughes Corporation offers a truly unique way to get exposure to commercial real estate right now.
Brookfield Property Partners
Like Howard Hughes Corp’s stock, looking at the price of Brookfield Property Partners’ stock doesn’t inspire a lot of confidence lately. The company’s portfolio of commercial properties is centered in two segments that have been hit incredibly hard by the novel coronavirus outbreak: office and retail.
Despite visible warts in Brookfield’s portfolio and a payout that looks like it could be cut, there are some reasons to think that Brookfield Property Partners is worth considering right now. A big component of the investment thesis lies in the parent company, Brookfield Asset Management (NYSE: BAM). Brookfield Asset Management is a Canadian alternative asset manager that has been owning and developing property for over 100 years. The parent organization’s playbook for managing its publicly traded partnerships has done an incredible job of creating wealth for long-term investors.
What’s more, Brookfield can offer something that few other U.S. commercial real estate stocks can: international exposure. While Brookfield Property Partners’ portfolio has large holdings in New York; Los Angeles; Washington, D.C.; and Miami, it also has significant holdings in London, Toronto, Berlin, Dubai, Sydney, Rio de Janeiro, and Sao Paulo. With other markets recovering from the effects of the novel coronavirus faster than the U.S., there is some value in geographic diversity.
Brookfield Property Partners isn’t for everyone. It’s structured as a master limited partnership, so there are some additional reporting headaches come tax time. Also, the company is trying to ride out this tough time and could potentially cut its payout -- which currently stands at 11.7%. Even should the company cut its distribution, this could be a compelling investment opportunity.
If you’re looking for a real estate investment with truly irreplaceable assets, then Vail Resorts is right up your alley. The company owns and operates 37 ski resorts in North America and Australia. Several of those properties are some of the largest and most frequented resorts in North America, including its namesake Vail Mountain, Whistler-Blackcomb, Heavenly, Beaver Creek, and Breckenridge.
If there was ever a case of a property type in constant short supply, it’s slopeside property. In the past 20 years, only five new ski resorts have opened and they are mostly small, niche operations. It’s not from a lack of interest, though. In a season cut short by COVID-19, the industry logged approximately 51.4 million visits to U.S. ski resorts. The 2019–2020 season was set to be a top-five season since records started in 1979. This is in addition to a top-five year in 2018–2019. The challenges of permitting and development make it extremely difficult to build a new resort from scratch, and it gives existing operators a huge leg up in pricing and developing their existing properties.
Vail Resort’s management decided to suspend its dividend payment earlier this year when it had to close operations at many of its resorts. The move was to preserve cash and get through what will likely be a challenging year. What matters most now is that the U.S. is able to get the virus outbreak under control by the time the snow flies next winter. With a stock that's well off its highs, shares of Vail Resorts look rather attractive.