2 Income Plays Set To Benefit From COVID-19 Vaccine News
Last week, I spent some time discussing the promising news of a potential vaccine developed by Pfizer (NYSE: PFE).
In short, I mentioned that the prospect of divided government for (at least) the next two years gave the market some confidence. Combine that with a vaccine that looks to be at least 90% effective, and, well, that just poured gasoline on the spark.
Now, this week, we got news that the vaccine from Moderna (Nasdaq: MRNA) is perhaps even more effective.
I won’t get into the details of each treatment today. And, as I mentioned back in my previous article, we’re not out of the woods yet.
But either way you slice it, this is great news.
So what does this mean for investors? While it may not be a full “all clear” sign, it’s definitely encouraging. I’ll reiterate what I said back in that piece last week:
“In the meantime, I’ll keep repeating what I’ve been saying throughout this year… Don’t let the major market averages fool you. There are still plenty of solid stocks that have only recovered a portion of what they lost during the Covid selloff.”
With all this in mind, I want to touch on two income stocks that could be beneficiaries of a somewhat-“return to normal”. I’ve been covering both over at my High-Yield Investing premium newsletter – and while both have bounced significantly off of their lows, there is still plenty of ground to cover to get back to “normal”.
College Is Back – And So Are Students
After a dubious start, NCAA football is back… a good reminder that college students are back on campus.
American Campus (NYSE: ACC), the nation’s top student housing provider, was kind enough to provide us an interim update on its numbers a couple of weeks ago. A clear dichotomy has emerged between incoming freshmen and upperclassmen that have been around for a while.
Apartment-style properties located off-campus (typically home to sophomores, juniors, and seniors) have an occupancy rate of 92%, up from 90% at the last update in July. The company has approximately 83,000 of these beds for rent, which means nearly 77,000 have been filled at this point. Rental rates have ticked modestly higher as well.
In contrast, on-campus resident halls for freshmen are only about 80% occupied, down from 89% two months ago. Why the drop? Well, there have been some last-minute cancellations and no-shows. That’s not terribly surprising, since many universities are currently offering some degree of virtual/online learning.
It would seem that first-time enrolled freshmen are content to stay at home with parents while they study remotely, while second-years and above are returning to see old friends. This gap will even out in time – fortunately, freshmen housing only accounts for about 10% of the portfolio.
Overall, occupancy rates have edged up to 90.3%, versus 97.4% a year ago.
In total, ACC owns 166 properties containing 112,000 beds. The firm also manages another three dozen housing complexes for a fee on behalf of third-party owners.
The lingering impact of Covid is still being felt. But ACC’s occupancy rates are creeping closer to normal. And I think the company will have no trouble finding eager students for new developments in California.
A Retail REIT Staging A Comeback
Along with airlines, cruise operators, and movie theatres, mall owners are particularly relieved at the prospect of a Covid vaccine. Enclosed shopping centers were already struggling even before the pandemic struck. While some foot traffic has returned, few malls are operating anywhere near 100% capacity.
Brookfield Property Partners (NYSE: BPY) reported just $97 million in funds from operations (FFO) in its core retail division last quarter, a sharp decrease from $173 million a year ago. Earnings contributions from hotels, apartment complexes, and other properties have also fallen. On the bright side, the company’s office properties (which have seen little impact on rent collections) chipped in $141 million for the quarter – an increase over last year.
Nevertheless, overall cash flows and realized gains dropped by more than half to $0.16 per share, well shy of covering the $0.33 per share quarterly distribution. Unlike many of its peers, Brookfield has maintained dividends during the pandemic.
Fortunately, the worst appears to be behind us. And despite the challenging environment, Brookfield leased 6.5 million square feet of retail space last quarter – with an average rate hike of 5%. Occupancy rates remain north of 93%.
In other news, Brookfield has teamed up with another mall owner, Simon Property Group (NYSE: SPG), to mount a takeover bid for foundering retailer JC Penney. I first discussed the possibility a few months ago. And after considerable delays for legal maneuvers, real estate dispositions, and other obstacles, a deal is nearing completion.
This isn’t the first time that Brookfield has bought an insolvent tenant to keep hundreds of stores nationwide from closing. It did so with Aeropostale and Forever 21 previously. But those aren’t key anchors like JC Penney. Brookfield and Simon are reportedly paying just $300 million (plus the assumption of debt) to rescue the iconic department store chain from the clutches of bankruptcy liquidation – a steal.
The two buyers would have incurred more than that just to redevelop these massive spaces and find new tenants, to say nothing of renegotiating leases with smaller renters due to “co-tenancy” clauses.
Action to Take
After sinking into the low-$20s in March, ACC has rebounded into the mid-$30s. But the well-supported yield remains at elevated levels north of 5%. I continue to rate this unique real estate investment trust as a buy for income-seeking investors.
For BPY, it’s not ideal for a property owner to be running a department store. But this option beats the alternative of having hundreds of cavernous, multi-level spaces go dark.
After a bumpy stretch, BPY seems to have stabilized. If the dividend can be maintained, BPY will deliver a double-digit income stream over the next 12 months. It’s still dicey, but retail rent collections have improved dramatically from around 30% during the lockdowns to 75% or better today.
Over at High-Yield Investing, we took full advantage of the Covid-selloff and scooped up high yields solid companies trading at a discount. And despite the recent rally, many of them are still “buys”.
To learn more about High-Yield Investing and join thousands of like-minded income investors in the search for opportunities you won’t hear about anywhere else, go here now.