Real estate investment trusts (REITs) have gotten clobbered this year. The sector's total return through the end of November is a negative 10.9%, according to Nareit. Some REITs have endured even deeper declines.
While 2020 has been a tough year for REIT investors, challenges often bring opportunities. One of them is the potential for a rebound in 2021. For some REITs, the upside could be significant. Three that could double an investor's money in the coming years are Brookfield Property (NASDAQ: BPY)(NASDAQ: BPYU), EPR Properties (NYSE: EPR), and Seritage Growth Properties (NYSE: SRG).
Highly valued real estate
Brookfield Property shares are down by about 15% this year and recently traded around $15.50 a piece. Weighing on the global real estate giant is the potential impact the COVID-19 outbreak could have on its office, retail, and hospitality properties. The company has already felt some effect this year as rental collection rates at its malls have been under pressure.
However, Brookfield believes investors have significantly undervalued its stock relative to the value of its underlying real estate. In the company's estimation, its global office portfolio is worth $13.90 a share. Meanwhile, it believes its leading U.S. mall portfolio is worth another $12.90 a share. Add it up, and Brookfield has a net asset value (NAV) of $26.80 per share, implying 73% upside from the current stock price. On top of that, Brookfield pays a dividend that currently yields 8.5%. Finally, it has billions of dollars of development projects that should grow its NAV as they come online and increase its net operating income.
Put everything together, and Brookfield certainly has the potential to double an investor's money over the next few years as fears fade and its development projects pay dividends.
Waiting for a much-needed shot in the arm
Shares of specialty REIT EPR Properties are down more than 50% this year. The primary issue is the impact the COVID-19 outbreak is having on its tenants, which operate entertainment venues like theaters, eat-and-play concepts, ski resorts, and other attractions. Governments forced many of these properties to close their doors this year to slow the spread of the virus. As a result, most tenants haven't been able to pay their rent.
However, 2021 could be a different story. Several vaccine developers recently reported positive data, which should result in their swift approval and rollout. That could result in a return to normalcy by as early as the middle of next year. It could also release significant pent-up demand for entertainment and experiences, which could supply operators with the cash to finally catch up on their rent payments.
Further, the REIT has a cash-rich balance sheet, which could enable it to go on a shopping spree over the next year as owner/operators consider sale-leaseback transactions to bolster their finances. If conditions for its tenants improve and it makes some deals, shares of EPR Properties could easily double in value in the coming years.
Unlocking the value of its well-located real estate
Shares of retail REIT Seritage Growth Properties have plummeted more than 60% this year. That's partially due to the impact the COVID-19 outbreak has had on its rental collection rate and redevelopment program. It also hasn't helped matters that both its CFO and CEO announced plans to leave the company to pursue other opportunities.
However, the fact remains that Seritage owns a vast portfolio of well-located retail real estate. The company currently has 195 properties, 109 of those attached to high-quality retail malls and another 86 free-standing locations or shopping centers. Though most of the value here isn't the current buildings but what these properties could become in the future.
Seritage's primary focus is on revitalizing legacy retail properties, primarily former Sears and Kmart stores, by redeveloping them into more valuable shopping, dining, entertainment, and mixed-use destinations. The company currently has $45.8 million of redevelopment projects under construction, which have the potential to generate $13.5 million of rental income over the next year as they come online.
Meanwhile, it has several more opportunities that it can pursue in the future. The only things standing in its way are access to capital -- it needs to sell properties to fund redevelopment projects -- and its ability to secure new tenants to back future redevelopments. On top of that, it needs to find a new CEO to lead its redevelopment efforts (it filled the CFO void internally). If it can continue making progress on its revitalization efforts, it could unlock the significant value of its well-located real estate.
High upside REITs
Brookfield Property, EPR Properties, and Seritage Growth Properties offer investors enticing upside potential as the real estate market recovers from the devastating impact of the COVID-19 outbreak. However, with that high reward potential comes a high degree of risk since several things must go right for these REITs to deliver on their promise. Because of that, investors shouldn't make too big a bet on these REITs since they could continue to underperform if things don't go according to their plans.