There is a ton of value in the stock market – if you’re completely ready to handle further falls from where you bought.  And you won’t know the timeframe for realising that value – only that, on the lessons of history, in the right stocks, you will do so.

Investors are starting to pick through the rubble of smashed-down valuations already, and yield-oriented investors are particularly interested in the income-producing streams known as “bond proxies.” In theory, these are stocks that generate dividend flows comparable, in their reliability, to those of bonds. In reality, a stock dividend should never be seen as being as reliable as the “coupon” payments of a fixed-interest security, such as a bond, and all investors should understand this; but on the stock market, there are securities that provide relatively steady income streams.

From time to time, company stocks themselves have been viewed in this way: the big four banks and Telstra, for example, have been considered rock-solid for dividends, in fact, for increasing dividends. But even before the Coronavirus crash, this strategy had been found wanting, particularly for Telstra. Not only did the telco cut its dividend, but from early 2015 on, investors received a brutal lesson in the capital risk of a stock: what good was Telstra’s supposedly strong yield, if the share price more than halved, as it did over 2015–2018?

The stocks that can lay the biggest claim – however imperfectly – to bond-proxy status, are the real estate investment trusts (REITs), infrastructure stocks and utility stocks, and it’s there that a lot of investors are looking for the bottom. This is fraught with danger, because we simply cannot know what level of economic dislocation we will see, and what impacts that has on these stocks’ cashflows – whether rental or traffic volumes.

Some stocks have already withdrawn guidance they had given the market on expected earnings and distributions/dividends for FY20. Broker Macquarie Group reckons 73 of the 182 Australian stocks in its “universe” of close coverage will cut dividends in FY20. Some REITs have joined the flurry of companies withdrawing guidance: Vicinity Centres (co-owner of Australia’s largest shopping centre, Chadstone in Melbourne), Scentre Group (which operates the Westfield chain of shopping centres), diversified trust GPT Group and Mirvac Group (which is becoming more focused on master-planned housing communities) have all withdrawn guidance recently, but this is far from a REIT-only problem.

In contrast, APN Industria REIT, which mainly owns industrial, warehouse and business park properties, and APN Convenience Retail REIT, which owns service stations and their attached convenience stores, reaffirmed their existing distribution guidance.

The Australian REITs have been badly pounded in price. At one point this month, the A-REIT sector index was down 48%; it is now down 43%, having bounced 9.6% from its low.

That is a worse fall than the S&P/ASX 200, which was down 34.1% at the low, and is still down by 33.1%. But the REIT sector – like the infrastructure sector – does contain plenty of assets providing steady income streams, and such stocks are being seen as relatively defensive plays.

Part of sifting through the rubble of the stock exchange is being aware of consensus earnings and dividend expectations – and consensus price targets – that incorporate out-of-date contributions. If a consensus contains broker contributions from February, for example, it is useless, given how the Covid-19 outbreak has changed things so quickly. But if price risk is accepted, some prospective yield situations on REITs and infrastructure stocks start to look better than others – with the obvious caveat that things could change very quickly.

The market has already priced-in not only widespread lower dividends and distributions, but recession in Australia and global economic slowdown. In general, when it comes to REITs, balance sheets and interest cover are in better shape than before the GFC, and the bottom line is that if the REITs’ tenants can pay the rent, and continue occupying the space – and there will be individual negotiations on the lease terms – distributions will hold up.

These individual negotiations will be critical. Indications have come that landlords understand that they have to accept lower rents from tenants in an attempt to avoid store closures. Dexus, the biggest office landlord in the country, and Stockland, a major shopping centre owner and property developer, have both said they would do whatever it took to ease pressures on their tenants.

For the infrastructure stocks, traffic/useage flows are the critical number. Sydney Airport, for example, is a high-quality asset – a monopoly asset – but there is a direct link between passenger arrivals and departures and its revenue, so every flight cancellation hurts it.

A March update from Sydney Airport told the market that total traffic in February 2020 was 3.1 million passengers, down 9.3% on the February 2019 result. International traffic was 1.1 million, down 16.8% on the prior year, while domestic traffic was 2.0 million, down 4.5% on the prior year.

In its 2019 full-year results, published on 20 February 2020, SYD described the initial impact of coronavirus as “SARS-like.” For the first nine days of March, provisional data indicated a 25% decrease in international passenger traffic and a 6% decrease in domestic passenger traffic. During February, travel across most nationality groups was hit, with Chinese numbers down 72.4% and South Korean numbers down 34%, on the prior year. This reflected the instigation of travel restrictions by the Australian government, reduced capacity by airlines and reduced passenger demand. Activity at Sydney Airport is unlikely return to anything like a normal pattern until 2021.

Here are some potential pockets of value in the REIT and infrastructure space.

10 pockets of value in the REIT space

1. Scentre Group (SCG, $1.62)
SCG down 67.3% at the worst; now down 61.2%.
Brokers reducing forecasts for earnings and distributions by 25%–40% but still envisages sufficient serviceability and liquidity.
Most recent target price: Credit Suisse (23 March) $2.50
If distribution same as FY19, at 22.6 cents, yield would be 14%
If distribution fell by 50%, to 11.3 cents, yield would be 7%
If distribution fell by 25%, to 16.725 cents, yield would be 10.3%

2. Stockland (SGP, $2.14)
Has withdrawn FY20 guidance.
Most recent target price: UBS (10 March) $4.80
If distribution same as FY19, at 27.6 cents, yield would be 12.9%, unfranked
If distribution fell by 50%, to 13.8 cents, yield would be 6.5%, unfranked
If distribution fell by 25%, to 20.7 cents, yield would be 9.7%, unfranked

3. Charter Hall Retail REIT (CQR, $3.16)
CQR down 41.6% at the low; now down 37.4%.
Has withdrawn FY20 guidance, but says it remains well-capitalised with no debt maturities until FY22
If distribution same as FY19, at 28.8 cents, yield would be 9.1, unfranked
If distribution fell by 50%, to 14.4 cents, yield would be 4.6%, unfranked
If distribution fell by 25%, to 21.6 cents, yield would be 6.8%, unfranked

4. APN Industria REIT (ADI, $2.01)
ADI down 43% at the low; now down 37.4%.
Market update 19 March: reaffirmed FY20 distribution guidance of 17.5 cents.
If distribution matches guidance, yield would be 8.7%, unfranked
If distribution fell by 50%, to 8.5 cents, yield would be 4.2%, unfranked
If distribution fell by 25%, to 12.75 cents, yield would be 6.3%, unfranked

5. APN Convenience Retail REIT (AQR, $2.79)
AQR down 35.1% at the low; now down 30.6%.
Market update 19 March: reaffirmed FY20 distribution guidance of 21.8 cents.
If distribution matches guidance, yield would be 7.8%, unfranked
If distribution fell by 50%, to 10.45 cents, yield would be 3.7%, unfranked
If distribution fell by 25%, to 15.675 cents, yield would be 5.6%, unfranked

6. GPT Group (GPT, $3.26)
GPT down 51.2% at the trough; now down 49.9%.
Most recent target price: Macquarie (23 March) $5.40
GPT has withdrawn 2020 guidance (the retail portfolio has provided most of the uncertainty). GPT says 60% of the rental income remains robust.
If distribution same as FY19, at 26.5 cents, yield would be 8.1%, unfranked
If distribution fell by 50%, to 13.25 cents, yield would be 4.1%, unfranked
If distribution fell by 25%, to 19.875 cents, yield would be 6.1%, unfranked

7. Vicinity Centres (VCX, $1.135)
VCX down 62.1% at the worst; now down 58.3%.
Most recent target price: Morgan Stanley (19 March) $2.07
VCX has withdrawn FY20 guidance because of further deterioration in the retail trading and operating environment. The company has also suspended the buyback program.
If distribution same as FY19, at 15.9 cents, yield would be 14%, unfranked
If distribution fell by 50%, that is 7.95 cents, yield would be 7%, unfranked
If distribution fell by 25%, to 11.925 cents, yield would be 10.5%, unfranked

8. Mirvac Group (MGR, $1.97)
MGR down 53.2% at the low; now down 44.3%.
Most recent target price: UBS (19 March) $3.49; Credit Suisse (19 March) $2.76; Morgan Stanley (19 march) $3.40
If distribution same as FY19, at 11.6 cents, yield would be 5.9%, unfranked
If distribution fell by 50%, to 5.8 cents, yield would be 2.9%, unfranked
If distribution fell by 25%, to 8.7 cents, yield would be 4.4%, unfranked

9. Dexus (DXS, $9.33)
DXS down 37.5% at the worst; now down 33.2%.
Most recent target price: Morgan Stanley (11 March) $13.00
Morgan Stanley believes Dexus is “ideal” for taking shelter during market volatility. The leases are underpinned by fixed 3.5-4%/year increases, while a tight Sydney office market should cushion the impact of uncertainties.
If distribution same as FY19, at 50.2 cents, yield would be 5.4%, 9.1% franked (grossed-up, 5.6%)
If distribution fell by 50%, to 25.1 cents, yield would be 2.7%, 9.1% franked (grossed-up, 2.8%)
If distribution fell by 25%, to 37.65 cents, yield would be 4.0%, 9.1% franked (grossed-up, 4.2%)

10. Goodman Group (GMG, $11.44)
GMG down 42.8% at the low; now down 31.8%.
Most recent target price: Morgan Stanley (10 March) $17.80
Morgan Stanley estimates a possible -7-17% decline in the valuation should coronavirus materially affect the business: but says earnings guidance should be safe, however, and the broker suspects any major hit to earnings is likely to come in FY22.
If distribution same as FY19, at 30 cents, yield would be 2.6%, unfranked
If distribution fell by 50%, that is 15 cents, yield would be 1.3%, unfranked
If distribution fell by 25%, to 22.5 cents, yield would be 2%, unfranked

2 pockets of value in the Infrastructure space

1. Sydney Airport (SYD, $4.86)
SYD down 53.3% at worst; currently down 47.7%
Four brokers (Morgan Stanley, Credit Suisse, Ord Minnett and Macquarie) have updated research in the last week – the consensus target price of the four is $6.55
If distribution same as FY19, at 39 cents, yield would be 8%, unfranked
If distribution fell by 50%, that is 19.5 cents, yield would be 4%, unfranked
If distribution fell by 25%, to 29.25 cents, yield would be 6%, unfranked

2. Transurban (TCL, $10.50)
TCL down 41.5% at the low; now down 36.1%.
Most recent target price: Ord Minnett (17 March), $14.50
If distribution same as FY19, at 59 cents, yield would be 5.6%, 6.56% franked (grossed-up yield 5.7%)
If distribution fell by 50%, that is 29.5 cents, yield would be 2.81%, (grossed-up yield 2.9%)
If distribution fell by 25%, to 44.25 cents, yield would be 4.2%, 6.56% franked (grossed-up yield 4.3%)