Q: "I wanted to know your thoughts on adding to W.P. Carey (NYSE: WPC), Realty Income (NYSE: O), and Howard Hughes (NYSE: HHC) at current valuations. I know for a long-term hold you will likely make out well, but are these picks considered good value for your money at this time or are there better value-hunting options?" -- James
A: Thanks, James, and that's a great question. The simple answer is that I think there's tremendous value for patient long-term investors in the real estate sector right now.
As far as the three stocks you mentioned are concerned, I'll take them one at a time.
W.P. Carey is probably the least affected by the COVID-19 pandemic. The real estate investment trust (REIT) has a diverse portfolio of single-tenant properties, with high concentrations in industrial, warehouse, and office properties. There is some retail in the portfolio (about 17% of base rent), but net-lease single-tenant retail is largely made up of "essential" businesses that aren't terribly recession-prone. With shares down by about 23% from before the pandemic, W.P. Carey has held up considerably better than many other real estate stocks but could be a great long-term value at the current price. Plus, it pays a generous 6.2% dividend yield.
Realty Income also specializes in single-tenant properties but is far more concentrated in retail, with about 80% of its properties occupied by various retail businesses. Much of Realty Income's portfolio is also essential, recession-resistant businesses -- top tenant types include drug stores, convenience stores, and dollar stores -- but it does have some exposure to the more pandemic-affected parts of retail, like restaurants. Even so, Realty Income is financially sound and could be a steal at 32% less than its February high. Realty Income is one of the largest holdings in my personal stock portfolio, and it's one that I'm thinking of adding even more to.
Lastly, Howard Hughes Corporation is by far the riskiest of the three stocks you mentioned. The developer of master-planned communities (MPCs) has seen its stock price plunge by nearly 60% since the pandemic began, and for a few reasons. For one thing, many of the company's owned properties are some of the most-affected types, such as hotels and retail. What's more, Howard Hughes is very levered to the health of the oil market, as three of its master-planned communities are in the Houston area (and Occidental Petroleum (NYSE: OXY) is a major tenant). Furthermore, Howard Hughes' financial flexibility wasn't nearly as strong as the other two companies you mentioned; in fact, the company had to sell about $600 million worth of stock to raise capital after the pandemic hit. Having said all that, there could be tremendous long-term value in Howard Hughes Corporation once the pandemic is over.
The bottom line is that there are some excellent real estate stocks to consider buying right now. I own two out of the three mentioned here and have actually added shares of Howard Hughes in the past few months. However, I wouldn't expect a smooth ride with any of them. They're likely to be rather turbulent until the longer-term economic effects of the pandemic become clearer.
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