TFSA investors: 1 battered REIT to buy before full recovery from COVID-19


The best investment deals are found during a crisis. There are a number of battered Canadian real estate investment trusts (REITs) available to investors against the grain. Income yields soared after massive sales when COVID-19 hit North America earlier this year, and bold investors are seizing the opportunity to prepare for juicy lifetime income returns in corporate accounts. tax-free savings (TFSA).

Some real estate trusts have faced more existential threats than others during the worst time of the pandemic. Rent collection from retail REITs was pathetic in the second quarter as non-core businesses were forced to close. However, commercial properties fared much better than hotels. They have multi-year leases that provide some income protection. Rent deferrals mean they can recoup some losses.

On the contrary, hotel REITs do not have long-term leases. They needed vibrant national and international travel and an outgoing culture to maintain strong bookings. These preconditions were absent during lockdowns this year.

However, things may soon change with the hope of a vaccine. Popular American Dr Antony Fauci was cited by Bloomberg Thursday saying that “the end is in sight” and that COVID-19 will not be a pandemic for “much longer”, while citing the rapid progress in vaccine development.

Investors may want to take a look at battered REITs that have performed poorly during the pandemic. Their recovery could be dazzling.

Such confidence is a hotel owner who stays on my radar. I recommended it as a buy for April 2020. It has increased 24% since then. Business is recovering impressively, and vaccine availability could drive units up.

American Hotel Income Properties REIT on a solid recovery trajectory

We have seen a remarkable recovery American Hotel Income Properties (TSX: HOT.UN) Revenue, occupancy rate, cash flow and net operating income for the third quarter of 2020.

AHIP has a portfolio of 78 premium branded hotels located in the United States. Most of its properties have been recently renovated. All of its hotels were open from the third quarter through September 30.

Quarterly revenue increased 69.8% sequentially to US $ 46.3 million, while revenue per available room (RevPAR) increased 67% sequentially. While revenues were still 47.7% lower than in the quarter last year, the rapid pickup in month-over-month occupancy rates is very encouraging.

Watch the constantly improving occupancy rates

AHIP REIT hotels are not as dependent on group and corporate guests as their peers. This explains its better performance compared to its peers.

AHIP hotel occupancy rates increased to 57.1% in the third quarter from 34.7% in the second quarter. The occupancy rate continued to improve, reaching 58.3% in October. Although occupancy rates remain 19% lower than last year, the recovery is notable.

Third quarter net operating income increased 239% sequentially to $ 14.6 million. The figure is still 50.8% lower than the comparable quarter last year, but it was nonetheless a very commendable performance.

More importantly, AHIP was one of the few hotel owners to report positive operating funds (FFOs) during the quarter. The REIT is already generating positive cash flow before the pandemic ends.

In addition, AHIP’s unrestricted cash balance increased 51% on September 30, compared to December 2019 levels. The Trust successfully negotiated relief on its outstanding loans. Management has postponed payment of the outstanding purchase consideration for 12 hotels from December 2020. This will be done in installments over the next year, giving confidence a bit of a breather.

Should You Buy The Plunge On The Beaten Hotel REIT?

The signs of recovery on AHIP are already encouraging. The units of the trust remain deeply underwater for 2020. Investors could still see significant capital gains, as business returns to normal over the next few years.

AHIP Performance YTD units – November 13, 2020 (Source: YCharts).

Although the leverage is high at 58.2% of the gross book value of the debt, the trust has no significant debt maturities until June 2022 and the average interest rate on the debt is manageable. at 4.55%. If interest rates remain moderate until 2023, as forecast by the Bank of Canada, then AHIP may be successful in surviving the current onslaught.

Its new CEO Jonathan Korol has even agreed to receive half of his salary in units until 2021 to align his interests with those of shareholders. He is confident in the future prospects of the trust.

Perhaps now is the best time to pounce on the battered hotel REIT before it reinstates legally mandated income distributions. Units may soon increase.

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