The coronavirus is a scourge that has upended society as we know it. But as the U.S. increasingly learns to deal with this novel illness, there are notable opportunities in the real estate investment trust (REIT) space. It has been a hard slog, with lots of learning along the way, but W.P. Carey (NYSE: WPC), Ventas (NYSE: VTR), and Simon Property Group (NYSE: SPG) all look like they are set up nicely for a post-COVID world. Here's a quick look at each and why they might be a nice addition to your portfolio.
1. We got this
Starting off the list is W.P. Carey, a net lease REIT that sailed through the pandemic in relative stride. In fact, even at the worst point, W.P. Carey was able to collect 96% of the rents owed -- that's an impressive number that suggests there was minimal impact on its portfolio. So this isn't a turnaround story, like the other two names here.
But that doesn't mean W.P. Carey doesn't have something special to offer. It's one of the most diversified REITs you'll find, with assets spread across the industrial (25% of rents), warehouse (22%), office (22%), retail (18%), and self-storage sectors (5%; a fairly large "other" category rounds things to 100%). It also has material exposure to Europe (36% of rents). That means it can put money to productive work in many different environments. So, despite the headwinds of 2020, W.P. Carey was pretty early in disclosing that it was ready to start buying.
The focus has been on the industrial and warehouse space, but it's also picked up some retail assets as well. The key takeaway is that the REIT has been able to use the pandemic to build its portfolio so that, as the world moves beyond the coronavirus, it will come out the other side an even stronger competitor. And it offers a generous 5.4% dividend yield backed by 24 consecutive annual dividend increases. That's a lot to like even for conservative investors.
2. You can't fight demographics
Next up is Ventas, which owns a diversified collection of healthcare assets. Although the REIT's medical office and medical research properties held up well during 2020, its senior housing properties were hit very hard. That's not shocking, given the nature of the coronavirus (it spreads easily in group settings, and older adults are most at risk). Adding insult to injury, of the 44% of rent that Ventas collects from senior housing, 26% comes from its senior housing operating portfolio (or SHOP in industry lingo). This is a very big deal.
SHOP assets are senior housing properties that Ventas owns and operates, so the property-level performance flows directly through to the REIT's income statement. Net lease assets (the other 18% of its senior housing business) pay rent, which doesn't go up and down with property-level performance.
In reality, Ventas hires other companies to handle the day-to-day activity at its SHOP assets, but there's no way to sugarcoat the hit this segment took in 2020. And it’s lingering, with first-quarter net operating income in the SHOP business off by a painful 42.5% year over year in the first quarter of 2021. It's not shocking, then, that the REIT cut its dividend by 43% in 2020.
And that's the opportunity as the U.S. learns to deal with COVID-19. Ventas is already seeing improvement in its SHOP business. Assuming that trend continues, there will likely be a notable recovery in the business that will flow directly onto the REIT's earnings statement.
Backing that outlook up is the fact that the elderly population is set to materially increase in size in the years ahead, boosting the need for Ventas' assets. They say demographics is destiny, and if that's true (generally speaking, it is), Ventas is going to be very well-positioned as the world comes out of the COVID-19 haze.
3. People just like to shop
The last name on this list is Simon Property Group, one of the largest publicly traded mall owners. Owning malls wasn't a great thing in 2020, with people asked to socially distance and nonessential businesses getting shut down by government mandate. Simon had trouble collecting all the rent it was due in the early days of the pandemic, and funds from operations were still lower by nearly 11% year over year in the first quarter of 2021.
But here's the thing: People are social animals, and shopping is an important pastime for many people. In fact, while foot traffic was still recovering in the first quarter, Simon reported during its first-quarter 2021 earnings conference call that sales at its properties had basically returned to normal levels. Malls continue to be an important part of life for many Americans, which means retailers are likely to remain tenants, at least for the types of high-quality malls Simon tends to own.
In fact, Simon is so positive about the future that it increased its full-year FFO guidance for 2021 when it reported first-quarter earnings. The increase was fairly small (about 1% at the midpoint), but it was the direction that was notable. Simply put, things are starting to look up for this mall landlord. Like Ventas, Simon cut its dividend in 2020 (by 38%), but now that performance is starting to improve, the REIT has already started to increase its dividend again.
This too shall pass
COVID-19 is terrible, but it isn't the end of the world. W.P. Carey has sailed through this period and, in fact, is using it to strengthen its business. Ventas and Simon both got hit hard, but each is starting to see the early signs of a turnaround. And that should lead to notable business improvements in the years ahead. If you're looking for REITs to own in a post-COVID world, this trio is definitely worth a deep dive.