When it comes to business disruptors, we've had the dot-com crash, the financial crisis, and even a few wars over the past few decades. But there hasn't been anything like the COVID-19 pandemic.
Not surprisingly, the pandemic affected most businesses in one way or another. And some were affected permanently. These three real estate investment trusts' (REITs') businesses were heavily impacted and will likely require a somewhat different strategy even after the pandemic is behind us.
This pure-play outlet REIT faced high vacancies
Prior to 2020, Tanger Factory Outlet Centers (NYSE: SKT) hadn't really had to worry about vacancies. In fact, since 1996, Tanger's occupancy has not fallen below 96% -- not even during the financial crisis. However, the pandemic caused several retailers with large outlet presences to declare bankruptcy, including Ascena Brands (parent of LOFT), Brooks Brothers, J.Crew, and more. As a result, Tanger's occupancy fell to less than 92% by the end of 2020.
How has this changed the business? Well, for starters, Tanger was forced to invest aggressively in its omnichannel capabilities. For example, the company launched a virtual concierge service that allows shoppers to explore any of Tanger's properties from anywhere in the world.
The company has also been seeking relationships with larger (space-filling) tenants, recently opening the first DICK's Sporting Goods (NYSE: DKS) outlet at a Tanger property. And it appears that Tanger is starting to see the value of incorporating non-retail elements into its properties -- in fact, it recently added WeWork's CEO to its board.
When you're losing money, the last thing you can afford is disruption
Seritage Growth Properties (NYSE: SRG) wasn't making money before the pandemic, but that was part of the plan. Seritage's business model is to gradually develop old Sears properties into modern, mixed-use spaces. But while it wasn't profitable, it was certainly heading in that direction.
Then the pandemic hit, and Seritage was forced to defer some of its tenants' rent, unload income-producing properties, and more. In a nutshell, the pandemic set Seritage's business plan back a couple of years during a time when it really couldn't afford it.
Seritage brought in a new leadership team led by experienced redevelopment pro Andrea Olshan to right the ship. Olshan isn't convinced that Seritage's strategy of gradually unloading assets to finance its operation is best and plans to quickly dispose of about one-third of its portfolio to raise capital and fund its highest-value projects.
A bad time to have half your assets in movie theaters
Last but certainly not least, it's tough to make the case that any REIT was hurting more than EPR Properties (NYSE: EPR) in 2020. And if you aren't familiar with the company, this line tells you all you need to know: Before the pandemic, nearly half of EPR's rental income came from movie theaters.
Even after most other retail and hospitality businesses started to reopen in mid-2020, movie theaters remained largely shuttered for the entire year. Not only that, but for a while, it was a strong possibility that AMC Entertainment (NYSE: AMC) -- EPR's largest tenant -- wouldn't survive the pandemic.
Fortunately, AMC's financial position has become much more solid, and EPR feels confident in returning to growth mode later this year. However, it's fair to say that the pandemic showed EPR why diversifying away from its movie theater concentration could be a wise move.
Some REITs were changed even more
This isn't meant to be an exhaustive list of REITs that were affected by COVID-19. Most REITs that rely on people physically going places saw their businesses heavily impacted. And these aren't even the most affected -- so far, three mall REITs have declared bankruptcy, and in all three cases, the pandemic certainly didn't help. But I decided to stick with REITs that could still be solid investments.
The Millionacres bottom line
As a final thought, just because all three of these REITs have been changed forever doesn't mean they were all changed for the worse. For example, the pandemic forced Tanger to accelerate its omnichannel focus and go after larger, space-filling retailers, both of which should pay off nicely in the long run.
COVID-19 also forced Seritage to rethink its gradual asset disposition strategy in favor of more aggressive action, which could help it unlock value faster than previously thought. And finally, while EPR Properties would certainly rather not have experienced the massive uncertainty surrounding the movie theater business, it may have given the company motivation to pursue growth opportunities that diversify its revenue stream.