The commercial real estate sector has been under a lot of pressure this year because of the COVID-19 outbreak. Many tenants didn't pay their rent on time, which impacted the cash flows of most landlords. However, collection rates have been improving in recent months, which has significantly enhanced most real estate companies' cash flows.
While rental rates have bounced back, many real estate company stock prices haven't recovered. Because of that, investors can pick up some great bargains this month. Leading the way are Brookfield Property (NASDAQ: BPY)(NASDAQ: BPYU), Kimco Realty (NYSE: KIM), and UDR (NYSE: UDR).
The problem is the stock price, not the yield
There has been a lot of concern about Brookfield Property's dividend, which currently yields more than 10% following a roughly 25% slide in its stock price this year. Usually, a double-digit payout is a sure sign that a reduction is imminent.
However, Brookfield put those dividend concerns to rest at its Investor Day last month, where CFO Bryan Davis stated:
In light of our recent share price, our distribution may seem high, but that's not how we look at it. Our distribution is set based on our long-term outlook for earnings of this business. And our target is to pay out to our unitholders 70% of those earnings. … Some years, we may end up paying more, but those years will be balanced by those that we pay less.
Thus, the CFO concluded, "we don't think our yield is too high. We actually think our share price is too low, which leaves me with my last key takeaway: Our share price is too low."
The company backed that view by offering to repurchase $1 billion of its shares in a direct offer to investors. However, because they only tendered about half that amount, Brookfield launched another program last month to buy back up to 10% of its publicly traded shares on the open market. Clearly, Brookfield believes the market has significantly undervalued its stock, which is why it's trying to buy back as much as it can.
It thinks investors should do the same, with CEO Brian Kingston commenting at that event: "Today, our shares trade at a significant discount to the underlying value of our real estate. And so purchasing them at these prices, provide investors with both an attractive yield as well as meaningful upside when we do ultimately recover."
Market conditions are improving fast
Retail real estate investment trust (REIT) Kimco Realty did suspend its dividend earlier this year when many of its tenants stopped paying rent. However, the company reinstated it, albeit at a lower rate, in September thanks to an improvement in its rental collection rate from 76% in June to 85% by August.
Meanwhile, the REIT said that it expects to "establish a more normalized and well-covered dividend level based on our adjusted funds from operations and REIT taxable income in 2021." As long as its rental collection rate keeps improving, that payout level will be much higher next year.
However, despite these positives, Kimco's stock is down about 30% this year. That looks like an attractive entry point for one of the largest and strongest grocery-anchored shopping center operators in the country.
A high-quality apartment landlord on sale
Apartment REIT UDR has lost more than 40% of its value this year, pushing its dividend yield up to 4.2%. That's a deep discount for a company with a long history of outperforming its apartment peers as it has outpaced the NAREIT Apartment Index in each of the last three-, five-, ten-, and 20-year periods.
One factor driving the REIT's steady outperformance is its peer-leading NOI growth. The company noted on a recent investor presentation that it takes a "surgical approach to maximizing NOI through targeted blended lease rate growth and active occupancy management."
For example, it has generated an incremental $32 million of annual NOI over the past five years by doing things like renting common areas and package lockers and setting up some units as furnished short-term rentals. Meanwhile, it charges premium rentals rates on apartments with higher-than-average occupancy levels due to their location in the building (e.g., those in a high-rise overlooking green space).
That active management has paid dividends this year as the REIT's operating performance has trended better than most peers. On top of that, it has a solid investment-grade balance sheet and a relatively conservative sub-70% dividend payout ratio. Those factors give the REIT the financial flexibility to navigate the current challenges in the multifamily market and take advantage of investment opportunities that may arise.
High-quality real estate stocks on sale
The turbulence in the commercial real estate market has created some intriguing opportunities for value-hunting investors. Shares of Brookfield Property, Kimco, and UDR are down sharply this year even though they're holding up reasonably well. Because of that, investors can buy into their high-quality, income-generating real estate portfolios at some compelling values this month.