Although hardly in the rearview mirror just yet, the coronavirus pandemic was a massive headwind for real estate investment trusts (REITs) in 2020. Not all REITs got hit, of course, but some key sectors were deeply impacted, including retail, healthcare, and anything that had an experiential component. Which is why it's so exciting to see that Federal Realty (NYSE: FRT), Welltower (NYSE: WELL), and EPR (NYSE: EPR) managed to beat analyst expectations in the second quarter.
1. Could have been worse
Federal Realty owns strip malls and mixed-use assets, which generally held up pretty well during the pandemic because around 75% of its properties contain grocery stores. That, however, doesn't mean that the REIT didn't face its fair share of headwinds, noting that its properties also contain things like restaurants, gyms, and locally owned stores, all of which were hit particularly hard.
At one point, the REIT was projecting that its occupancy would fall well into the 80% range before starting to rebound. That would have been a tough number to see, given that occupancy was roughly 95% at the end of 2019.
Only that drop didn't happen. In fact, demand for this landlord's highly curated portfolio of around 100 or so properties remained fairly robust, and occupancy ended the second half of 2021 just shy of 90%. In fact, the company described its leasing activity as being at "record levels."
It's no wonder that its funds from operations (FFO) came in above analyst expectations. The beat was huge, too, with Federal Realty besting consensus by more than $0.25 per share. In defense of analysts here, they are only making educated guesses -- even companies don't really know what they will earn in any given quarter. But it's clear that Federal Realty is coming out of the pandemic on a strong note.
2. Demographics won't be denied
Welltower owns senior housing properties, which are purpose-built to bring older people together in a group setting. That was a terrible business to be involved in during the early days of the pandemic since the coronavirus spreads easily in group settings and is highly dangerous for older adults. Move-outs (which includes residents that die) rose, move-ins slowed down, and costs increased. Welltower and its peers were really hit very hard.
That said, the story for senior housing, and healthcare properties more generally, hasn't changed. The baby boom generation is aging, and demand in this segment is set to rise. In fact, demand has already started to rebound, despite the ongoing issues the world faces with COVID variants.
To put a number on that, Welltower's senior housing occupancy rose 190 basis points in the second quarter, beating its internal expectation for a 130 basis-point improvement. That's not to suggest that business is back to normal, but it looks like the company is past the nadir and is now starting to recover.
And, perhaps not shockingly given the occupancy bounceback, Welltower beat analyst expectations when it reported second-quarter FFO. To be fair, the two-cent beat wasn't anywhere near as impressive as what Federal Realty achieved. However, the headwinds facing Welltower were far more grave, so it was still nice to see the REIT turn things around more quickly than Wall Street was expecting.
3. The changes aren't over yet
EPR, the last name on this list, isn't really a good proxy for a broader group, like strip malls (Federal Realty) or senior housing (Welltower). That's because EPR has a niche investment approach around owning experiential properties, meaning people have to be there to enjoy them. That includes owning things like movie theaters, amusement parks, and, perhaps less enjoyably, educational properties.
Its business was hit harder than most during the downturn, as governments closed nonessential businesses and asked people to socially distance themselves. Rent collections fell to 21% during the second quarter of 2020. That's not a sustainable number and helps explain why EPR completely suspended its dividend last year. (For reference, Federal Realty increased its payout by a token amount and Welltower trimmed its dividend by roughly 30%.)
At the end of the second quarter, however, EPR's rent collections had rebounded to 85%. That's still not great, but it's far better than what it was a year earlier. That beat the company's own expectations and has EPR expecting a number between 95% and 99% by the fourth quarter of the year. It beat consensus FFO estimates by $0.22 per share.
The problem here is that nearly half of the company's rents prior to the pandemic came from movie theaters, a business that is still in a state of flux thanks to the combination of the pandemic and growing demand for streaming content. So there are still material risks here that suggest EPR is most appropriate for more aggressive investors.
However, it's hard to deny that the business has turned a corner and that the outlook isn't nearly as bleak as it once was. The second quarter beat basically put an exclamation point on that notion. The dividend, meanwhile, has been reinstated at about two-third of its previous level.
Better, but still with us
It's pretty clear that 2020 was a unique year for real estate and the world. Federal Realty, Welltower, and especially EPR faced headwinds that couldn't have been foreseen. However, now that the world is at least starting to get a better handle on living with the coronavirus, each of these REITs is witnessing a stabilization of their businesses. Analysts weren't prepared for the extent of the rebound, but that's actually good news for these specific REITs and, where appropriate, the sectors they represent.