The stellar publication The Economist brings gravitas to the real estate investment sector, despite the world still grappling with the pandemic and the recession it birthed. Its lead story for July declares:
The house wins–America’s housing market is so far unfazed by recession…Residential property-worth $35trn, slightly more than America’s stockmarket (sic)-seems strangely oblivious to the economic carnage around it.
Hitherto, real estate has not been among my picks of essential industries in an environment of crisis management investing. But taking a hint from The Economist, W. P. Carey, Inc. (NYSE:WPC) is worth strong consideration by retail value investors. A smaller company in the sister sector of real estate is Hoya Capital Housing (HOMZ) that I previously recommended. Know the former is an ETF and WPC a REIT.
Consider the Bigger Picture
Encouraging employment data have been forthcoming in recent labor reports. Doctors are sharing comforting reports about treatments, cures, and vaccines on their way. Equities markets are bouncing back. Following steep declines, real estate equities surged in the first week of July with all 18 property sectors in positive territory. Housing is back leading in the early stages of the economic rebound comparable to the big bump last May.
Another factor inter alia for considering HOMZ and WPC as worthwhile, long-term investment opportunities, is this generation is on the cusp of the greatest transfer of wealth in the history of the world. PNC predicts:
About 10,000 boomers turn 65 each day. The aging boomer population means that an estimated $59 trillion of wealth will be passed down to millennial children and heirs.
They are certain to spend some money on consumer goods, electronics, tech, and fashion, helping stimulate the economy. Lots are likely to be invested in real estate and the stock market. Millennials were already aggressively buying houses before the virus shutdowns. “The American dream of homeownership is still very much alive,” writes Frederick Peters in Forbes. The homeownership rate topped 64% when mortgage rates stood at 3.8%. They are now at just above 3%. My father’s mortgage rate in 1954 was over 4%. Improving economic conditions are a healthy portent for HOMZ.
Source Seeking Alpha
HOMZ Means Homes: Betting on Residential
The HOMZ stock price impressively fought back up after the March plummet. The price continues climbing into mid-year trading despite political turmoil, international fears of cyberwars, shooting wars, food hoarding, and recession. HOMZ is a relatively young company scrambling to attract investors. The lockdowns and economic headwinds helped suppress the HOMZ share price and volume of trade but the stock price is climbing back. Contrastingly, the share price is characterized by low volatility offering comfort to risk-averse investors looking for a safe harbor right now.
Source: Seeking Alpha
Over the long term, HOMZ enjoys momentum potential as a stable investment because:
- Millennials will inherit money they likely will use to buy houses and HOMZ is heavily invested in homebuilders
- Staying single longer means a healthy market for residential rental properties and property management with HOMZ invested in residential property management companies and home centers
- Home improvement companies are seeing their shares rocket to 52-week highs
- The states‘ millennials are reportedly considering to live off lower price housing thus spurring the potential for ETF investment growth
A downside to owning HOMZ is there are no surprises or exciting news that will gin up the share price. The buyout potential of HOMZ is nil. It will grow through organic growth and better marketing the ETF to more investors. Perhaps it is time for management to show some flexibility, too, with share prices down in some related sectors that appear to be better investments beyond homebuilders?
Hypothetical $10,000 Investment as of 05.31.2020
W. P. Carey: Mature but with Warnings
WPC share price is midway between its 52-week low of $38.62 and high at $93.62. The dividend yield tops 6%. WPC is a mature $16B company. WPC is largely into industrial commercial and office spaces but demand for office spaces is expected to contract 17-30%. The industrial sector is expected to do better with more manufacturing returning to the U. S. The W. P. Carey company is one-quarter each into industrial properties, offices, and warehouses; then comes storage facilities and others.
Company holdings are two-thirds in the U.S. One-third of their holdings are in Europe. The remaining 2.1% are elsewhere. If WPC is able to forefend the devastating fall-out the virus has on retail and entertainment properties, earnings are forecast to grow nearly 32% per year. This will be the impetus for a rise in the share price closer to its former high for the year.
Source W. P. Carey
Through Q1’20, the share price was not volatile, but since then, the share price has bounced around between the low $50s crawling up to its current price ~$68. An investor might wait for another dip before plunging into a buy mode. The share price might soften going forward as the company sells $330M worth of 4.75M shares to pay down parts of its $1.8B unsecured revolving credit. Currently, interest payments are not comfortably covered by company earnings. Profit margins once topped 40% but today are nearer 25%. The +6% dividend might be a red herring, for debt troubles, profit deterioration, and share price dilution lie ahead? WPC’s debt seems manageable if anticipated growth forecasts bear out.
Source: Simply Wall Street
Think Long on Both HOMZ and WPC
Real estate investing is always in style for the rich. That’s certainly true for the wealthy people I know on three continents. Diversification is the key to cash flow and success. Investing in HOMZ gives access to residential markets. WPC gives access to the industrial, warehouse, and office markets in the U.S. and Europe. The COVID-19 storm is wreaking havoc on retail and their landlords but investors in HOMZ and WPC are more insulated from this segment. Their income generation is strong and potentially this will be reflected in their share prices. At the very least, the share prices of the ETF and REIT are less sensitive to volatility than other stock investments. I recommend waiting for WPC to dip again into the low $60s and HOMZ below $25. Then, buy and hang on until there is a vaccine. Property values traditionally rise over time offering a natural increase in the assets of HOMZ and WPC because like Will Rogers said they ain’t making more of it.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.