The stock market's rally over the past few months has been nothing short of remarkable, but there are still some great bargains to be found for patient long-term investors, especially in the real estate sector. Here's why I'm keeping my eye on AvalonBay Communities (NYSE: AVB), Howard Hughes Corporation (NYSE: HHC), and STORE Capital (NYSE: STOR) as the summer comes to a close.
Top-notch apartments in desirable areas
Many experts are worried that people are going to be leaving expensive urban areas in droves. Not only are more companies allowing employees to work remotely, which could persuade city dwellers to look for cheaper housing, but there's also a worry that the elevated unemployment rate will lead to rent delinquencies as well.
For reasons like these, apartment real estate investment trust, or REIT, AvalonBay Communities -- which specializes in high-cost urban and suburban markets -- is trading for 25% less than it was at the start of 2020. However, the company's business has fared rather well. AvalonBay collected 97% of its rent in the second quarter, which isn't too far off from the normal level. And occupancy in the company's communities is nearly 95%.
Obviously, nobody has a crystal ball that can predict the future. But I'm convinced that once the pandemic is over, people will still want to live and work in cities, and AvalonBay will be just fine.
A real-life Sim City
Howard Hughes Corporation has been beaten down in the COVID-19 pandemic. Even after rebounding a bit over the past few months, the stock is still trading for less than half of its value at the start of 2020.
To be fair, there are some good reasons for this. The company's general business model is to build commercial properties (like hotels and retail real estate) in its master-planned communities, and many of its properties have been closed and/or tenants haven't been able to pay rent. Plus, the company's flagship community (The Woodlands) is in the Houston area, as are several others, and the real estate market there is highly dependent on the strength of the oil industry. And some struggling oil companies (particularly Occidental Petroleum (NYSE: OXY)) are major tenants at Howard Hughes' office buildings, which adds to the uncertainty.
While the uncertainty level has definitely gone up a few notches, the long-term thesis remains intact. Howard Hughes has a unique business model that allows it to control the supply of buildable land and commercial amenities in some highly desirable places. Management prioritizes long-term value creation, and patient long-term investors could be getting in at a bargain price at these levels.
The right kind of retail
STORE Capital hasn't been beaten down nearly as much as most other retail REITs, but it's still 24% lower for the year.
If you aren't familiar, STORE Capital is a "net-lease" REIT specializing in retail and service industry properties. The idea is that the company's tenants sign long-term leases with annual rent increases built in, and the tenants cover property taxes, insurance, and maintenance (this is what net lease means). And most of the tenants are in businesses that are recession-resistant or are relatively immune to e-commerce competition: Think auto repair businesses, furniture stores, farm supply stores, and car dealerships.
However, about one-third of the portfolio is occupied by industries that have been severely affected by the COVID-19 pandemic, specifically restaurants, day care centers, health clubs, movie theaters, and family entertainment centers. Recent results are strong, and virtually all of STORE Capital's tenants (except for the movie theater tenants) have reopened, and the company collected 86% of its August rent with some of the rest deferred to a later time.
In short, this is a 5%-yielding stock trading for a much steeper discount than it deserves, and now could be a smart time to add it to a long-term stock portfolio.
Great long-term investments, but expect short-term volatility
As a final thought, it's important to emphasize that I think investors will do well with these three real estate stocks over the long term. In other words, if you buy them, I'm confident you'll be happy you did a decade or two from now.
However, I have absolutely no idea what they'll do over the next week, month, or year. There are simply too many variables (especially with the pandemic ongoing) that can move their stock prices in the short term. So, if you decide to invest in any of them, do so with a long-term mentality and prepare to deal with some volatility in the meantime.