No REIT Is Pandemic Proof, But These 3 Are Close – Seeking Alpha

“The Discovery Channel is bringing the people what they need: Shark Week in April, months earlier than the usual July programming.” So wrote on March 31.

Sure enough, itself has the lineup on its own website, beginning with “Shark Vortex” at 9 a.m. on Saturday, April 4. After that comes:

  1. Great Hammerhead Invasion – at 10:00
  2. Sharks of the Badlands – at 11:00
  3. Alien Sharks: Stranger Fins – at noon
  4. Air Jaws Strikes Back – at 1:00
  5. Laws of Jaws 2 – at 2:00
  6. Ronda Rousey Uncaged – at 3:00
  7. Phelps vs. Shark – at 4:00.

Other celebrity appearances apparently include Shaquille O’Neal and the Food Network’s Guy Fieri. And that’s just day 1 of 2.

(Personally, I find the evening’s lineup especially intriguing, with “Bear vs. Shark,” “Expedition Unknown Megalodon,” and “Capsized: Blood in the Water.”)

Seeing all that though made me wonder this age-old and exceptionally important question: How likely are you of being attacked by a shark?

For those of you also contemplating such monumental matters, I have good news: The Florida Museum says it’s a 1 in 11.5 million chance. Which, admittedly, is far less than your chance of getting COVID-19.

Which, also admittedly, is probably much more on your mind these days than shark attacks.


An As-Accurate-As-Possible Assessment of COVID-19

According to – which advertises itself as having “anything you want to learn about the finance world” – as of April 2, there were 1,554 confirmed coronavirus infections in my home state of South Carolina.

Those potentially infected range from 49,728 to 111,888 out of a total population of 5.1 million.

Meanwhile, there were 245,175 confirmed cases in the whole U.S. and 1,039,166 cases in the world. Compare that to the 327.17 million U.S. population and the 7,794,739 global count.

Please note we’re not talking about deaths here, only the number of people who have most definitely contracted it.

That number, no doubt, will grow further before this COVID-19 crisis ends. But still, especially with all these social distancing measures in place…

The odds are in our favor, at least when it comes to knowing we got it. Considering what experts are saying about asymptomatic cases – many of which don’t seem like symptoms of anything at all – who ultimately knows.

Which, for the record, is my exact point.

You just never know.

You never know whether you’re going to be that unfortunate one in 3,748,067 individual who dies by shark. Or the one in 340,733 who die from fireworks, the one in 156,169 who die from train crashes, or the one in 79,746 who die from lightning strikes.

I could go up the Florida Museum list to show what we’re most likely to die of, but I’d rather not. We have enough problems to deal with today.

Like COVID-19, which is affecting almost everyone regardless of whether we physically contract it. People have lost their lives. They’ve lost their livelihoods. They’ve lost their easy access to resources and loved ones.

I wonder what the chances of that were…

Changes and Non-Changes in the Age of Coronavirus

Chances are what we have to take these days with every single investment we make. Which, admittedly, isn’t any different than how the markets have always operated.

There’s no guarantee that any stock, preferred stock, bond, option, fund, or other portfolio possibility will be a winner. There are only probabilities.

Unfortunately, in this new coronavirus environment we’re working with, those probabilities are not in our favor the way they used to be. That’s a new reality we have to deal with: A reality that’s flipped our previous existence on its head… after tumbling it around repeatedly…

And kicking it a few extra times for good measure.

This time, it might actually be different for some REITs. And it’s going to be a struggle for most of them regardless.

But the ones that come out ahead? We have no idea the golden opportunities we might be staring at right now. At these prices, the profits could be enormous once everything COVID-19 is said and done.

As I said on Thursday, “Now is not the time to become a cigar-butt investor.” In the best of economic times, I’m rarely ready to buy up speculative stocks. And since these are far from that ideal, I’m especially not willing to put money down on mere guessing games.

So don’t go scooping up everything in sight.

There’s not a single REIT out there that’s pandemic proof. There’s not a single stock that is either.

That’s why we have to be as careful as can be to limit our risk while sorting through the possibilities. Like the following three:

More Than a Fighting Chance

Before providing you with our list of three of our most pandemic-proof REITs, I wanted to show you our property sector “stress card” that illustrates the risk levels for our REIT coverage universe.

Source: iREIT

So, as you can see, the green-shaded property sectors appear to be the lowest risk categories because of their limited impact to social distancing. In fact, several property sectors, namely cell towers and data centers are actually benefiting from increased demand related to physical distancing.

That’s one of the reasons I decided to include CyrusOne (CONE) as one of my top pandemic-proof buys.

Back in February CONE decided to reduce G&A to “right size the organization” and the company attributed these changes to “recognition of the continued moderation in demand from hyperscale customers.” The company said that trend began “in late 2018” and the company said it’s “appropriate to reduce the cost structure to more closely align the business with current market conditions.”

Note: Hyperscale is a technical word used to describe the ability of a company to scale appropriately as increased demand is added. It’s often used to associate with infrastructure required to run large sites for companies such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

Then just over a month ago the company’s CEO left suddenly, and according to Wells Fargo analyst, Eric Luebchow, CONE appeared to be prepping itself as a “more attractive takeover target.” And he observed that the REIT’s “more muted growth outlook for 2020 may make it more difficult to garner the type of M&A valuation/multiple that many CONE investors were hoping for.”

One of our attractions to CONE has been the “land rich” portfolio that consisted of $800 million of construction and $200 million in land investments. And in a COVID-19 update the company said, its “data center portfolio is fully operational” and has “not experienced any shutdown of construction projects”. The company added that:

“The supply chain remains intact, with redundancy of supply for key operational and construction-related products.”

To weather the pandemic, CONE has significant available liquidity as the company recently amended its senior credit agreement, extending the maturity and decreasing the interest rate margins applicable on the revolving credit facility and term loans. The amended agreement consists of a $1.4B revolving credit facility, which includes a $750M multicurrency borrowing sublimit, and term loan commitments totaling $1.1B. CFO Diane Morefield:

“This amended credit facility is another step in our ongoing efforts to maintain a strong balance sheet and ample liquidity.”

CONE shares are now trading at $61.83 with a P/FFO multiple of 16.7x (the four-year average is 17.2x). Although the dividend yield of 3.23% is lower than many of the higher risk REITs, we believe there’s strong price appreciation potential given CONE’s coveted development pipeline. We maintain a Buy (shares trade -3% below our Fair Value target).

Source: FAST Graphs

Our next pandemic proof pick is Corporate Office Properties (OFC).

I know what you’re thinking, “nobody is going to the office these days”…but…

Corporate Office is a unique office REIT that is specifically focused on serving U.S. government agencies and defense contractors engaged in defense information technology and national security-related activities. This is a very strategic niche, and one in which COPT’s tenants are generally focused on knowledge-based activities such as cybersecurity, R&D, and other highly technical defense and security areas.

COPT has a strategic tenant niche that provides real estate solutions serving a specialized cyber-based platform. The defense installations (or government demand drivers) where COPT’s tenants operate are R&D, high-tech knowledge-based centers, NOT weapons or troops-related.

Accordingly, COPT has a regional focus on owning properties in targeted markets or submarkets in the Greater Washington, DC/Baltimore region with strong growth attributes. The company is a market leader in these markets, and the company has identified five impacts of industry recovery that are or will be driving demand at these mission-critical, Defense/IT locations.

So this means that you want find WeWork within COPT’s portfolio and the concentration of lease expirations within the mission critical defense/IT locations mitigates rollover risk (barriers to exit): Overall renewal rate of 70%−75% expected in 2020 (on 1.16 million SF of large leases expiring by the end of 2021). COPT expects to renew 85%−90% of leases and 100% of the SF are at defense/IT locations.

The company has a dramatically improved balance sheet (BBB-) and has committed to operating at conservative leverage levels (debt/EBITDA ~6.0x » debt/adjusted book ≤40%). Shares trade at $19.82 with a P/FFO multiple of 10.3x (five-year average is 13.7x). The dividend yield is 5.5% and we recently upgraded to a Strong Buy.

Source: FAST Graphs

Our final pandemic proof pick is Hannon Armstrong (HASI), a REIT that invests in the energy sector. The company maintains a diversified portfolio including equity investments (24%), government-backed projects (14%), commercial business (40%), and consumer customers (22%). Whether individuals, municipalities, or corporations, HASI’s clients tend to have strong credit profiles.

HASI structures deals in a manner that makes it among the first to be paid. For example, projects on top of its solar land assets pay Hannon Armstrong as an operating expense which makes the REIT a higher priority than even interest on debt.

Around 98% of debt is fixed rate and HASI’s BB+ rating by S&P and Fitch is one notch from investment grade. Provided HASI maintains financial discipline, the probability of an investment grade credit rating increases with time and the size of its portfolio.

From a liquidity standpoint, the aggregated commitment for the firm’s lenders is $450 million and is in addition to the existing ATM equity issuance program. While some REITs are being forced to cut distributions and negotiate with lenders due to a credit crunch, HASI is not among them.

Given the substantial pullback in the company’s share price, we have become increasingly attracted to the margin of safety that exists, in terms of HASI’s price, P/E (12.7x), and dividend yield (of 7.6%) We view shares as highly attractive and supporting our Strong Buy thesis in which we forecast annualized returns in excess of 25% (over a 12 month period). We recently added HASI to our “Cash Is King” Portfolio.

Source: FAST Graphs

Thank you for reading and please be safe. I look forward to your comments!

Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

Markets will eventually recover, and may reward patient investors…

Investors need to remain disciplined with their investment process throughout the volatility. At iREIT on Alpha we offer unparalleled research that now includes a “daily” vodcast and mortgage REIT coverage. “There is great opportunity” to take advantage of the selloff.. subscribe to iREIT on Alpha (2-week free trial).

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Disclosure: I am/we are long OFC, CONE, HASI. 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.

Additional disclosure: Williams Equity Research assisted the HASI content and he owns shares (in HASI). Also, I co-wrote a book with the head of investor relations at OFC.


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