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3 Cheap REITs to Buy in May 2020


May 22, 2020 by Jason Hall

Real estate is often a wonderful investment for income. It's why many investors looking for a high dividend find themselves investing in REITs, or real estate investment trusts. Unfortunately, the novel coronavirus pandemic has affected many commercial real estate investments, with a lot of tenants not able to pay rent due to government-ordered closures of many businesses.

A lot of REITs are experiencing big drops in earnings and cash flow, and that's leading to dividend cuts and even suspensions. And that has led to a lot of people selling their REIT shares as they move away from commercial real estate and look for greener dividend pastures.

As a result, REIT shares, as a class, are far cheaper than the market. The Vanguard Real Estate ETF (NYSEMKT:VNQ) -- a good proxy for equity REITs as a category -- is down more than twice as far as the SPDR S&P 500 ETF Trust (NYSEMKT:SPY) from the 2020 high at this writing. For investors with money to deploy, that means there's plenty of opportunity to buy several cheap REITs today and profit handsomely when things normalize. Some of those cheap REITs still offer excellent and dependable dividends for income, too.

Here are three high-quality REITs specializing in three different kinds of commercial real estate. Whether you're looking for dependable income today, an ultra-cheap valuation, or the prospects for a big dividend yield in the future, you'll find an ideal investment among these options.

A top operator in a beaten-down industry

There's no doubt that people are worried about nursing homes and seniors housing properties right now. Seniors are the most at-risk population to COVID-19, and the highly-contagious virus has spread like wildfire through several already.

Nobody wants to own a nursing home that has an outbreak of COVID-19 that kills residents. Some facilities have seen an outflow of residents and much slower rates of new resident admissions. Costs are also climbing due to additional and necessary practices to keep residents and employees safer.

As a result, most of the REITs that focus on this type of property have seen their shares fall sharply. Some have had to cut dividends due to the financial impact, and it's likely that the next year could be painful across the sector.

The one that I like the best, CareTrust REIT Inc (NASDAQ:CTRE), has so far held up incredibly well, at least compared to its peers. While others are cutting their dividends, CareTrust just announced an 11% increase. That marks the sixth time CareTrust has increased its quarterly dividend, and the dividend is now double what it first paid in late 2014:

CareTrust is able to keep paying a high dividend yield because management has always prioritized capital strength. CareTrust's balance sheet is one of the least-levered of its peers as well, with only 39% debt to assets, and debt to EBITDA of 4.6 times as of the first quarter earnings results.

Despite this strength, shares are down about 28% over the past year. Whether it's a cheap valuation or a high dividend yield (about 5% at recent prices) you're looking for, CareTrust makes the cut.

This strip mall operator is safer than you think

There's no getting around it, non-essential physical retail is getting destroyed. With the pressure of e-commerce even before the coronavirus pandemic took hold, many kinds of discretionary consumer goods retailers were already struggling. Now, many of them won't survive this crisis.

That's why shares of Retail Opportunity Investment Corp (NASDAQ:ROIC) are down more than 60% from their 12-month high. Investors are worried that many physical retail property owners will face a spate of tenants going permanently out of business, wiping out cash flows and maybe even causing some of the REITs to fail.

Even ROIC, as the company is known, has certainly not been immune. The company, which operates strip malls on the U.S. West Coast, had to temporarily halt its dividend due to the coronavirus lockdown's impacts on its earnings.

But it looks like the beating this REIT's stock has taken is far more severe than the damage COVID-19 is doing to its business. The company's properties feature grocery and pharmacy tenants as anchors, making them attractive to other potential tenants. Not only does this help drive demand for its properties during "normal" times, but it's also really valuable today.

According to the company, 79% of its leasable square footage is leased to tenants deemed "essential businesses," as of April 22, and almost 90% of those remained open. That put over 70% of its tenants as open for business. As of May 5, the company reported 70% of April rents had been paid.

That's not exactly great, but it's pretty strong in the current environment. Moreover, ROIC's balance sheet gives it plenty of room to breathe. It started the second quarter with $134 million in cash and $367 million available on its credit facility and only has $23.1 million in debt maturing between now and late 2023.

The suspension of the dividend may not be ideal for investors looking for income today, but if you can wait for the dividend to come back, ROIC should be on the top of your list of cheap REITs to buy. After all, before the coronavirus crash, it had increased the payout every year since 2010, raising the dividend 233% over that period:

Between the stability of a large portion of its tenant base and a strong balance sheet, I expect today's prices will look like a steal when the dividend gets reinstated.

Always in demand

The coronavirus pandemic has resulted in massive unemployment, and even residential real estate investments aren't immune from the implications. That shouldn't keep investors looking for cheap REITs from considering AvalonBay Communities (NYSE:AVB).

AvalonBay owns almost 300 apartment communities in 11 states, including some of the most in-demand markets in the U.S. The apartment REIT has quickly adapted to meeting the health and safety needs of potential tenants and employees via virtual tours. After a sharp decline in March, leasing activity rebounded quickly in April, returning to "almost normal" levels according to management on the first-quarter earnings call.

Rent collections have also held up quite well. April residential collections were 96%, below the benchmark of 97.9% but still very strong in the current environment. AvalonBay's business has held up well enough that the board approved keeping the dividend at $1.59 per share, the same as it paid last quarter and up 4.6% from last year.

Lenders are also pretty bought-in on the strength of this business. AvalonBay raised over $900 million in very low-cost capital in the first quarter. $700 million of that came via a 10-year bond that pays only 2.3%.

Yet like so many other high-quality REITs, AvalonBay is dirt cheap. Shares are down 32% off the 2020 high, and the dividend yield is nearly 4%. You have to go back more than a decade, to the heart of the global financial crisis to find the last time AvalonBay's dividend yield was this high:

Just as then, AvalonBay should prove able to ride things out while continuing to pay investors a high dividend. Today's price is a steal considering the strength of the dividend and the valuation.

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Jason Hall owns shares of CareTrust REIT and Retail Opportunity Investments. The Motley Fool owns shares of and recommends Retail Opportunity Investments and Vanguard REIT ETF. The Motley Fool has a disclosure policy.

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