Real estate investment trusts, or REITs, have had a very tough year in 2020, with almost all suffering large share price falls. Yet, the impacts of the coronavirus pandemic have been felt differently across the sector. For example, REITs exposed to shopping malls have seen large scale devaluations of their portfolios due to the economic impacts of coronavirus.
GPT Group (ASX: GPT) is a company with a strong exposure to retail. Consequently, its recent report showed a reduction in funds from operations (FFO) of 23%. In fact, the retail sector of its diversified portfolio lost 11% of its valuation. Another REIT likely to see a large scale reduction in both FFO and statutory profit after tax is Vicinity Centres (ASX: VCX). None of this takes into account the impact of the second lock down in Victoria.
However, the coronavirus has not hit all real estate shares equally hard. Some have sailed through with their business plans intact, while others have been actively growing their assets. Fortunately for investors though, the market doesn't seem to have caught up.
Diversified real estate shares
Abacus Property Group (ASX: ABP) is a diversified REIT. According to the company's portfolio statement, it has a balance sheet of $3.3 billion in total property assets as at H1 FY20, a significant increase from FY19. This breaks down into approximately 50.6% in office buildings, 34.4% in storage space, 6.8% in small convenience shopping centres, and about 8.2% in non-core assets.
During the pandemic if you are going to be invested in retail, then in my opinion the small convenience stores are the right ones to invest in. They generally have supermarkets as anchor tenants, along with pharmacies, medical centres and hairdressers. All businesses that are essential – even hairdressers stayed open during the original lockdown.
Furthermore, Abacus has begun to show a growing interest in accumulating storage assets. Recently it increased its holding in rival National Storage REIT (ASX: NSR) to 8.09%. This is part of the organisation's move to a recurring annuity type income stream, instead of its previous value-add model.
Lastly, the REIT has a price/book ratio of 0.74 (at the time of writing). This is the ratio between the current market capitalisation and the net asset value. Anything under 1 means that, in theory, you could purchase the entire company, pay off all its debts and sell the assets for a profit. This REIT trades at a reasonable price-to-earnings ratio (P/E) of 10.34, and has a trailing 12-month dividend yield of 6.93%.
Office real estate shares
I think DEXUS Property Group (ASX: DXS) is one of the best value real estate shares to buy right now. This REIT is diversified and owns $16.8 billion in office and industrial properties. Both of these sectors have survived very well through the pandemic.
Dexus also has 97.2% occupancy for its office properties and 96% for its industrial properties. Additionally, the company has a weighted average lease expiry (WALE) or average lease duration, of 4.4 years. So in the unlikely event that work from home becomes more prevalent, the company still has many years worth of leases that will have to be paid out. Personally, I think the work from home revolution has been overhyped. I do not think this will define future office work in Australia for various reasons.
Dexus is currently trading at a price/book ratio of 0.73, a very low P/E of 5.99, and pays a trailing 12-month dividend yield of 5.91%.
Safe retail shares?
Charter Hall Retail REIT (ASX: CQR) is, I think, the safest retail real estate share of any significant size available today. Like Abacus above, Charter Hall Retail owns a range of regional and sub regional shopping centres. These are in places such as Albany, Western Australia and Townsville in northern Queensland.
If you have spent any time at all in a regional centre, you would know what this means. A small mall, anchored with a shopping centre, pharmacies, bottle shops and hairdressers. Unlike their larger cousins in the big CBD areas, most of these traded straight through the lockdown, particularly in the unaffected regions. Consequently, it is likely have far less problems with rent deferrals.
Moreover, the company has recently paid $112 million for a 52% stake in a high quality distribution facility leased to Coles Group Ltd (ASX: COL) for 14 years. So not only is it surviving, it is growing.
I estimate the company is trading at a price/book ratio of around 0.76. In addition, it is trading at a relatively high P/E of 21.60 and has a trailing 12-month dividend yield of 6.42%.
Foolish takeaway
The current market volatility has many investors thinking it is easy to make a lot of money quickly on the share market. While this can be done, it is not the normal state of affairs. At some point, investors need to grapple with the issues of creating long-term value through buying great companies at reasonable prices.
All 3 of these REITs are great companies in my view. They are trading at prices below net asset value because the market has oversold them, not because they are performing badly. I am confident that these REITs will return solid share increases over the next 3–5 years, as well as continuing to pay healthy dividends. What's more, at this low entry point your personal dividend yield will increase as the share price rises.
