It's certainly been an interesting year for the stock market, to put it mildly. After the March market crash, few people would have expected that the S&P 500 would actually be up by 7% for the year in early November.
However, real estate has been a laggard, with the Vanguard Real Estate Index Fund (NYSEMKT: VNQ) still down by 13% year to date. And while many real estate investment trusts (REITs) have lots of pandemic-driven uncertainty holding their stock prices lower, there could be some fantastic bargains for long-term investors.
Now that we're well into third-quarter earnings season, here are three that have posted particularly strong results and could be worth a closer look.
This income machine is back in growth mode
STORE Capital (NYSE: STOR) was one of the most affected net lease REITs by the pandemic, simply because it has quite a bit of exposure to affected industries. Restaurants are STORE's top property type, and the company also has a fair amount of exposure to day cares, fitness centers, and movie theaters, to name a few. As a result, STORE Capital's stock price has rebounded a bit recently, but still remains more than 26% lower than where it started the year.
Despite the depressed stock price, STORE's business actually looks pretty strong. In the third quarter, STORE was not only profitable but earned more than enough to cover its dividend (which it recently increased). Virtually all of its tenant properties are open, and the company collected 90% of its expected rent in October.
Perhaps most encouraging is that the company feels confident enough to get back into growth mode. It invested more than a quarter-billion dollars in acquisitions in the third quarter, at historically high initial cap rates. With over a trillion dollars' worth of properties that meet STORE's criteria, I don't foresee the company slowing down.
Could the remote work trend actually benefit this REIT?
Unlike STORE Capital, Ryman Hospitality Properties (NYSE: RHP) is not doing well -- for now. Ryman, which operates large-scale, group-focused hotels and entertainment venues, is averaging a cash burn of $22.7 million each month. This is a substantial improvement from the second quarter, when virtually all of its properties were closed, but the pandemic is still taking its toll. Simply put, conferences, conventions, concerts, and other large gatherings are just not a thing right now.
Having said that, Ryman has enough liquidity (about 30 months' worth at the current rate of cash burn) to get through the tough times, and demand looks very strong once we get back to normal. In fact, Ryman has successfully rebooked more than 1 million cancelled room nights for 2021 and future years. And on the company's earnings call, CEO Colin Reed made an excellent point: With so many companies choosing to let their employees work remotely even after the pandemic, we could actually see higher demand for in-person meetings and conferences in the coming years.
A blue-chip REIT facing short-term headwinds
In the Ryman discussion, I mentioned the remote work trend, and many experts believe this will cause Americans to move away from cities in large numbers. After all, if you can earn a New York or San Francisco salary anywhere, wouldn't you want to live somewhere that costs less?
This logic certainly makes sense, and we're likely to see some people go this route. But fears of people leaving the cities they love are overblown, which has created an excellent opportunity to buy rock-solid apartment REIT AvalonBay Communities (NYSE: AVB). The REIT develops, owns, and operates higher-end apartment communities in primarily high-cost urban and suburban areas.
To be sure, AvalonBay is suffering a bit in the short term. Same-store rental revenue was down by about 6% in the third quarter, and occupancy is down by 2.7%. But this is likely to be more of a short-term trend. Millions of people love living in cities, and I'd bet they still will even if they're allowed to work from home.
Expect more volatility in the near term
To be perfectly clear, all three stocks are likely to remain somewhat depressed until the COVID-19 pandemic passes. So, while I'm convinced all three will have a very bright future, only invest if you're prepared for a bit of a roller-coaster ride as the pandemic and its economic effects continue to play out.