Making Money

You can still apply for Canada Revenue Agency’s (CRA) Canada Emergency Response Benefit (CERB) to get $2,000 a month if you haven’t already. However, eventually, the benefits will come to an end and there’s no guarantee that work will be readily available when the COVID-19 crisis ends.

Here’s how you can get $2,000 (or more) per month permanently.

Unless you think brick-and-mortar retailers and offices are dead, now is a great time to buy depressed real estate investment trusts (REITs) in these sectors because of the COVID-19 impacts.

For example, during this COVID-19 pandemic, I bought positions in Brookfield Property Partners  (TSX:BPY.UN)(NASDAQ:BPY) / Brookfield Property REIT (NASDAQ:BPYU), H&R REIT (TSX:HR.UN), SmartCentres REIT (TSX:SRU.UN), and STORE Capital Corp (NYSE:STOR).

Near-term Risk Exists in REITs, As Does Long-term Opportunity!

Don’t get me wrong. In the near term, there’s indeed high risk. These REITs that have large retail or office exposure can continue to be depressed and slash their dividends.

H&R REIT only collected 50% of its retail rents but 80% of its total rents in May. Enclosed malls are doing the worst during the pandemic as other than essential services tenants like grocery stores, others had to be shut down at one point or another to keep the public safe.

In April, I suspected that H&R REIT could cut its cash distribution in half. And in fact, it cut its cash distribution by 50% in May. That said, the stock still offers a nice yield of 7.1% at CAD$9.70 per unit. 

Source: F.A.S.T. Graphs with author annotation

I still believe H&R REIT can trade at CAD$19 per share in the future. That’s almost a double! As well, it’ll be able to restore its cash distribution to higher levels in a normalized market. Meanwhile, buyers today get paid a handsome passive income to wait.

The situation is similar for the other REITs. In terms of office properties, there’s the worry about people working from home and that offices will become obsolete. 

I believe most people still like human interaction. Therefore, high-quality office properties like the ones owned by Brookfield Property and H&R REIT should still be in high demand. 

Brookfield Property’s recent office occupancy rate was 93% with an average lease term of 8.6 years. H&R REIT received 99% of its office rents in May.

The High-Income Opportunity in These Value REITs

Brookfield Property, H&R REIT, SmartCentres REIT, and STORE Capital are all trading at huge discounts to their normalized levels. They’re value investments that offer big normalized yields.

Right now, they yield 12.8%, 7.1%, 9.2%, and 7.2%, respectively. Brookfield Property, SmartCentres, and STORE Capital haven’t cut their dividends yet. Due to the wide impact of COVID-19, there’s a chance that they could. However, their management is pretty supportive of their dividends. So, I’m keeping my fingers crossed. 

Brookfield Property is about 40% off from its normalized book value of, say, 60%. SmartCentres and STORE Capital are also nearly 40% off.

BPY Price to Book Value Chart

BPY Price to Book Value data by YCharts

H&R REIT is half price. 

If now is not the time to buy these REITs for income, I don’t know when is. When I say “now”, I mean during this COVID-19 period, maybe over the next few months or even through 2020. 

It’s time to average into these REITs and lock in high income yields. I imagine a scenario of holding these stocks for a long time to collect high income while complementing them with higher growth stocks in technology and other areas. 

The Tax Free Savings Account (TFSA) is a great place to hold some REITs for tax-free income that you can withdraw anytime.

Getting $2,000/month permanently

Assuming an equal-weight in each of these four REITs, the average yield of 9.07%. To get $2,000 per month from this high-income portfolio, an investor would need to invest $264,463 or roughly $66,116 in each. 

Let’s also keep in mind that I expect H&R REIT to nudge its cash distribution higher in a normalized market. Additionally, I expect dividend increases from the others, especially from Brookfield Property and STORE Capital. Therefore, the yield-on-cost will increase when the economy improves. 

$264,463 is not too much to invest for $24,000 a year of passive income, given that the yield is so much lower for a rental property that requires semi-active management. 

Investor takeaway

If you believe people still need to go to malls and offices, you should do your research on REITs such as Brookfield Property, H&R REIT, SmartCentres REIT, and STORE Capital right now. 

They offer great value and high income potential for long-term investment. They trade at discounts of 40% or more and provide an average yield of over 9%!

If you like what you’ve just read, consider subscribing via the “Subscribe Here” form at the top right so that you will receive an email notification when I publish a new article.

Disclosure: As of writing, we own shares of BPY.UN, HR.UN, SRU.UN, and STOR.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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