Earlier this week, most of our REIT investments jumped up by 10%-20% at High Yield Landlord. Interestingly, the big tech names Amazon (AMZN), Netflix (NFLX), Zoom (ZM), and others dropped by 5%-10% at the same time.
What’s causing this sudden shift in market sentiment?
The interim results of the phase 3 trial evaluating the vaccine candidate from Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) came out, and it showed to be more than 90% effective. An application for emergency use authorization is expected later this month, and Pfizer already is producing doses.
“I’m near ecstatic,” said Bill Gruber, one of Pfizer’s top vaccine scientists. “This is a great day for public health and for the potential to get us all out of the circumstances we’re now in.”
Now, I’m not a scientist, and quite frankly, I don’t know exactly what this means, but apparently, this is the first phase 3 success in the race for a vaccine. Given that we have another 10 vaccines in phase 3 trials, this first success likely isn’t the last one either:
The market is rightfully getting excited as we can finally see the light at the end of the tunnel:
When a vaccine is deployed, things will quickly return to normal, and we expect REITs to rapidly return to much higher valuations.
- Valuations are at a near 10-year low.
- Interest rates are at 0%.
- And fundamentals are already recovering.
The vaccine is the major catalyst that the market has been waiting for.
It is the “exit plan” out of this crisis.
What property types will benefit the most from a vaccine deployment?
We believe that the most-heavily impacted property sectors will benefit the most because they trade at the deepest discounts to fair value. This includes REITs that invest in malls, hotels, shopping centers, net leases, offices, and senior housings.
Most mall REITs are currently priced at 20-40 cents on the dollar:
Most hotel REITs are priced at 30-50 cents on the dollar:
Most shopping center REITs are priced at 40-60 cents on the dollar:
Most office REITs are priced at 50-70 cents on the dollar:
And most senior housing REITs are priced at 50-80 cents on the dollar:
This is what I would be buying today.
Yes, they are up significantly, but they remain deeply discounted.
If you look at long-term charts, the recent price increases are just a small bump in the way to recovery.
No one knows that will happen in the short run, but many of these REITs still have the potential to double or triple as they return to 52-week highs.
Below we discuss a few examples:
Simon Property Group (SPG)
If you look at SPG’s share price, it may not seem like it, but this is one of the highest quality REITs in the world:
- It has an A-rated balance sheet.
- A great management team.
- And a portfolio of Class A retail properties.
Retail is suffering greatly today but SPG has the balance sheet to survive and its fundamentals are quickly recovering. Already before a vaccine is deployed, the rent collection rate is back to >85%, and shopper traffic is slowly approaching pre COVID-19 levels.
When the vaccine news came out, SPG rose by 27% on Monday, but if you look at a long-term chart, this is only a small bump on its way to 52-week highs:
SPG was arguably undervalued at $160 per share, and it would need to more than double to get there. Shopper traffic, sales, and rent collection rates have strongly recovered even as we still battle this pandemic, so what do you think will happen when a vaccine is deployed?
Things will only get better from here, and priced at a 60% discount to NAV, SPG still has a lot of meat on the bone. The recent bump is just the beginning of the recovery, and while you wait, you earn a near 7% dividend yield.
Spirit Realty Capital (SRC)
SRC is a high-quality net lease REIT with a BBB rated balance sheet, ample liquidity, and long leases. It suffered unusually low rent collection rates early in the crisis when businesses were shut down, but since then, fundamentals have quickly recovered and now business is almost back to normal.
Similarly to SPG, SRC is up a lot lately. However, if you look at a multi-year chart, it’s only trading at the same level as in 2017 after it had collapsed following the bankruptcy of its biggest tenant:
Since then the company has spun off all its low-quality assets, greatly improved its balance sheet, and positioned itself for steady long-term growth.
Buying it in 2017 was a great investment, and buying it today is even better.
SRC is currently offered at 11x FFO which is about half of where it should be in a yield-less world. While you wait for the repricing, you earn a sustainable 7.2% dividend yield.
SRC and SPG are just two examples among many others, but you get the point: The recent rise is only the beginning.
Today, there exist generational buying opportunities in certain sub-sectors of the REIT market. Yes, prices are now somewhat higher, but they remain far from where they were earlier this year, and they will get there over time.
Closing Note: Fear of Missing Out vs. Fear of Losing Money
At High Yield Landlord, we won’t stop buying.
We cannot time the market and REITs could very well drop back to lower levels in the near term. However, we are very confident that our Top Picks will generate attractive returns in the long run, and that is what matters most.
We have repetitively shared the following chart with you over the past months:
Those REIT investors who remained patient following the great financial crisis made fortunes in the recovery as REITs nearly tripled.
Think like a landlord. Not like a trader.
Patience is richly rewarded in REIT investing.
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Disclosure: I am/we are long SPG; SRC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.