There's no way to sugarcoat how bad 2020 was for Simon Property Group (NYSE: SPG) and EPR (NYSE: EPR), given that both were forced to cut their dividends. However, with 2021 more than half over, things are starting to look very different for this pair of real estate investment trusts. While neither is fully out of the woods just yet, both REITs are clearly making a comeback. Here's what you need to know.
The mall is not dead
With over 200 enclosed malls and outlet centers in its portfolio, Simon Property Group is one of the largest mall real estate investment trusts you can own. This has been a tough space for a few years as leveraged retailers that failed to keep up with shopping trends have been closing stores and going bankrupt. (This has been called the retail apocalypse and largely attributed to the growth of online shopping, but it's really much bigger than that.)
The pandemic basically sped up the retail shakeout that was already underway but came with a lengthy period in which malls were forcibly shut by the government. Collecting rent was a problem at the worst point in 2020 and Simon cut its dividend 40% to preserve cash.
However, now that malls have been allowed to reopen, things are looking much brighter. Collecting rent is less of a fight, and occupancy has remained surprisingly resilient, sitting at 91.8% at the end of the second quarter. Simon still needs to fill empty space with vibrant new tenants, an effort that will take some time yet, but the worst appears to be over. In fact, the REIT upped its full-year 2021 guidance in both the first and second quarters. More important for dividend investors, the mall landlord has also increased its dividend twice, rewarding investors for the improvement in its underlying business.
The bigger takeaway here is that as weaker malls shut, the remaining, better malls get more attractive for consumers and retailers. All in, Simon looks like it is going to have a lot of winning malls when the dust finally settles. And that fact is already starting to shine through in its early comeback.
EPR was left for dead in the early days of the pandemic because it had a portfolio filled with experiential assets, from movie theaters to amusement parks. Even today, as the world begins to reopen, it is not for the faint of heart. But, it is impossible to deny that EPR's business has made a major comeback, a fact that should delight those that were intrepid enough to buy it when the chips were down. To put some numbers on that, EPR was able to collect 85% of the rent it was owed in the second quarter. That sounds bad, but it's up from 21% in the same period of 2020.
Which helps explain both why the dividend was suspended last year (to preserve cash) and why it was reintroduced, at a lower rate, in July. Like Simon, the worst appears to be over for EPR. And it is making sure that investors see the benefits of its comeback. That said, this REIT remains a much riskier option that's only appropriate for more active and aggressive income investors. That's because the details matter here.
Prior to the pandemic, around half of EPR's rent roll was tied to movie theaters. In an effort to help its tenants survive the pandemic hit, EPR granted rent concessions. Since the movie business is in a state of flux, partly thanks to streaming technology, it is likely that rent from movie chains won't go back to pre-COVID levels anytime soon.
In other words, half of EPR's business is still navigating through a very uncertain environment. If you aren't willing to monitor that closely, you shouldn't own EPR. If you are willing to do the legwork, however, the recovery here probably has more room to run.
Things can still change
Neither Simon nor EPR are low-risk investments. However, both of their businesses are clearly on the mend, and that has led to positive news on the dividend front. The fast-changing coronavirus situation remains a concern and poses downside risk. However, it looks like these two hard-hit REITs are making a comeback, with additional room for improvement at each. If you are an aggressive investor looking for turnaround plays, both are probably worth a deep dive.