Toilet paper. That’s all anyone was talking about last week.
And, judging by the news that comes up when you do a simple search for the bathroom product… it’s still a hot commodity. Here were the first-page headline results when I went looking:
- Chicago Tribune – “Thieves ransack restrooms, steal toilet paper and hand sanitizer from Sleeping Bear Dunes’ National Lakeshore in Michigan”
- Seattle Times – “With toilet paper in short supply, Americans are snapping up water-spraying bidets
- Palm Beach Post – “Coronavirus Florida: Even if you’re out of toilet paper, PBC leaders beg – don’t flush wet wipes”
- Houston Chronicle – “Nirenberg is tired of seeing ‘trunk full’ of toilet paper-hoarding”
- Tulsa World – “Do you have enough toilet paper on hand? This calculator can help you decide”
- The Daily Advertiser – “What stores have toilet paper, milk, eggs, other basic groceries in stock amid Covid-19
- Dallas Morning News – “Need toilet paper? Restaurants are evolving into general stores, offering eggs, meat, and other grocery essentials.”
There’s more where those came from, but you get the point, I’m sure.
In fact, I’m sure you got the point the last time you made a grocery run yourself. There are serious shortages of essential “stuff” right now thanks to concerns and shutdowns surrounding the Covid-19/coronavirus outbreak.
Like toilet paper.
Directly Profiting From the Coronavirus Chaos
The toilet paper situation is bad news for anyone who’s got to go (i.e., all of us). But that doesn’t mean that everyone’s suffering significantly from the shortage.
Some people and places are actually intensely profiting off this Covid-19 craze. And before you start hating them, I’m not talking about the over-the-top price gougers.
Those exist, unfortunately. We’ve all no doubt seen or heard about examples of such individuals and entities by now. However, the companies I’m talking about fall into a much more respectable category by far.
It’s not their fault that they’re making money the way they are. In fact, they’re no doubt rather harried right about now dealing with the exponentially increased demand.
Yet, stressed or not in the moment, they’re still going to automatically come out ahead in all of this. Which is a lot more than far too many other businesses can say.
No doubt you’ve recognized by now that I must be talking about grocery stores. I mean, it’s hard not to conclude that they’re making out big with this rash of customer-driven restrictions and rationing.
Out of all the retailers out there, supermarkets are going to do just fine, if from nothing else than selling cleaning and bathroom supplies.
As such, grocery-store anchored REITs are going to do just fine as well. It would be rather difficult for them not to when their biggest tenants are practically swimming in cash and credit card receipts… doing better than they ever have before.
Don’t Be Looking for Perfection
Before you point it out, I’m not ignoring these grocery-store anchored REITs’ smaller tenants. Not in the slightest.
Most of those businesses don’t have the luxury of selling toilet paper, which puts them at an obvious disadvantage.
Instead, they make their money off of services such as dry cleaning… luxury retail items such as furniture, high-heeled shoes, brand-name clothing, and the like… and prepared food offerings such as pizza, frozen yogurt, Chinese cuisine, and donuts…
Unfortunately, less people will have to worry about that kind of presentation or apparel without the jobs they had pre-coronavirus. They’re also probably going to be wary for a while about eating out, not to mention the money issues involved in such splurges.
Don’t be surprised at all when – at the end of all this – you see some significant store shutterings along your local strip malls.
Even so, come the next round of earnings reports – or perhaps the next one after that – I think it’s safe to say that investors will have revised standards for what’s good news and what’s bad news.
At least for a quarter or two.
As happened during our last economic panic, people are going to be looking for signs of life. Forget booming business, they’ll just want business in general.
(A strong economy will come back. Mark my words. It just won’t happen instantaneously.)
Taking that into consideration, the markets will be very willing to reward stocks that aren’t on the brink of death.
It’s going to be a changed landscape come April, May, or June – whenever we’re released from this social-distancing existence. But the desire and drive to make money in the markets won’t have changed one bit.
And most grocery-store anchored REITs will come out at least a shopping car or two’s length ahead.
No Social Distancing Here
Federal Realty (FRT) is one of our favorite shopping center REITs due to its highly disciplined risk management practices. The company owns 104 properties that consist of mixed-use properties and high-quality open-air shopping centers. Many of its anchors are grocery-anchored or home improvement chains, essential during this coronavirus crisis.
Also, Federal Realty has an “A” rated balance sheet that provides a cost of capital competitive advantage and is one of only 6 REITs with an “A” rating by both S&P and Moody’s. Federal Realty is the only REIT that has paid and increased dividend for 52 consecutive years in a row.
This “dividend king” is now on sale with shares trading at $76.05 and 12.2x P/FFO (-49 percent below the 5-year average). The dividend yield is 5.5 percent and well-covered by Funds from Operations (payout ratio is 67 percent).
Regency Centers (REG) is another high-quality shopping center REIT on our buy list. The company was founded in 1963 and is now one of the largest shopping center REITs with 400+ properties located in the nation’s most vibrant markets. Most of the properties are neighborhood and community shopping centers primarily anchored by highly productive grocers such as Publix, Kroger, Whole Foods, and Safeway.
Regency is rated BBB+ by S&P and to further strengthen its liquidity position (due to the coronavirus) in this rapidly evolving and uncertain situation the company recently drew down $500 million from its existing $1.25 billion revolving credit facility. Including cash balance of approximately $720 million on the balance sheet, Regency has total liquidity of approximately $1.27 billion.
Shares in Regency are also trading at bargain prices (closed at $40.40) with a P/FFO is 10.4x (-46 percent below the 5-year average). The dividend yield is 5.9 percent and well-covered by Funds from Operations (payout ratio is 60 percent).
I own shares in FRT and REG.
