An old Wall Street maxim is that you make your money when you buy a stock, not when you sell it. It's a statement that a value investor might make but well worth listening to noting that the broader market has reached all-time highs during a global pandemic. With that in mind, here are three real estate stocks that haven't participated in the advance, making them appear relatively cheap as January trading gets underway.
1. Location, location, location
Real estate investors have long paid close attention to the location of the properties they own, since even the best property, put in the wrong spot, is likely to be a dog. That's why Federal Realty (NYSE: FRT) has a relatively small portfolio of just 100 or so shopping centers and mixed-use properties. It doesn't want to own any old retail center; it wants to own the best ones in dense and wealthy neighborhoods.
These are locations that retailers want to be in and consumers want to shop at. It's this long-term approach that's the backstop for this real estate investment trust's (REIT) over five-decade-long streak of annual dividend increases. That's an incredible record that was extended in 2020, despite some material headwinds. Owning great properties doesn't mean that Federal Realty is immune to downturns. Indeed, in October of 2020 it only collected around 85% of the rents it was owed.
That's why the stock is off by roughly a third over the past year and the nearly 5% yield is near 10-year highs. It will take some time for Federal Realty to work through the pandemic headwinds, but history suggests it will do that and keep rewarding investors along the way. Buying it now, while it looks like it's on the bargain bin, could be a good idea.
2. Big cities should rebound
The next name up is AvalonBay (NYSE: AVB), which is one of the largest apartment owners in the United States. The REIT is off by nearly 25% over the past year, pushing its yield up to about 4% -- toward the high-end of its historical yield range over the past decade. The problem? Renters are fleeing big cities and moving to more rural areas.
That makes sense given the global coronavirus pandemic. And it's been particularly hard on AvalonBay, which is heavily focused on big coastal cities (both on the East and West Coasts). Thus, investors have dumped the stock. But this isn't the first time the world has been faced with a major crisis that has impacted big cities. Eventually, they come back just as strong, if not stronger. Which suggests that investors are, perhaps, throwing the baby out with the bathwater here.
Notably, using AvalonBay's third-quarter core funds from operations (FFO), which is like earnings for an industrial concern, the payout ratio is about 70% today. That leaves a lot of room for adversity before the REIT's investors need to worry about a dividend cut. If you can handle a little bad press, now could be a good time to add out-of-favor AvalonBay to your portfolio, before the big cities in which it invests start to rebound.
3. Office space still matters
The last name to look at here is West Coast office landlord Kilroy Realty (NYSE: KRC). Like city-based apartments, offices have been something of a pariah during the global pandemic because they bring people together in group settings. So the current work-from-home zeitgeist is a troubling social trend. Which is why Kilroy's stock is down roughly 30% over the past year. The stock's 5% or so yield is, however, attractively sitting toward the high end of its 10-year range.
That said, Kilroy collected 95% of the rent it was owed in October. Given the headwinds that's pretty impressive and suggests that employers aren't yet willing to give up on the office environment. In fact, the REIT actually increased its dividend in the third quarter of 2020, a sign of strength that investors shouldn't ignore despite the negative sentiment here.
Of note, Kilroy has been expanding its portfolio into the medical research space, which is a hot sector right now. In fact, it's one of the largest names in the space, competing quite well against healthcare-focused REITs. Assuming that the core office portfolio muddles through the pandemic, Kilroy's push into medical research should help it come out the other side of the pandemic a stronger company. And that means now might be a good time to add it to your portfolio, while other investors aren't giving the REIT the credit it deserves for the strategic shift it's making.
Cheap is hard
Investing would be so much easier if buying stocks when they are on sale didn't require going against the grain. But, sadly, that's just not how Wall Street works. If you want to buy a cheap stock, you usually have to jump in when others are selling. That's exactly what's going on today at Federal Realty, AvalonBay, and Kilroy. If you can stomach a little near-term uncertainty, however, these REITs look like they will be long-term winners in the retail, apartment, and office sectors.