When the world looks back at 2020, the most prominent entry in the history books will clearly be the coronavirus pandemic. It had a massive negative impact across the globe, including in the real estate investment trust (REIT) space. But that has also set up some opportunity as the world starts to adjust. Here are three REITs looking toward the eventual recovery with big expectations investors should take a look at.
1. Low risk
The first REIT up is Federal Realty Investment Trust (NYSE: FRT), which owns a collection of around 100 shopping centers and mixed-use developments. Its properties tend to be located in wealthy areas with large populations, so it's pretty well-situated.
However, the economic shutdowns used to slow the spread of the novel coronavirus had a big impact on its business. In the early days, the concern was rent collection rates, but that's largely passed. Now the big issue is occupancy.
Indeed, many retailers have gone out of business, and many of the survivors are looking to shrink their store counts. The REIT's occupancy was around 92% at the end of 2020, but management stated during Federal Realty's fourth-quarter 2020 earnings conference call that it expects its occupancy to dip in the 80% range in the first half of 2021 before it starts to recover in the second half. With a strong portfolio, there's little reason to doubt that the expected improvement will come to pass, but it's clear that more bad news is likely before good news starts to shine through.
That said, Federal Realty has an over 50-year streak of annual dividend increases behind it, including one in 2020. This is a reliable company that has lived through tough times before. There's a business recovery to look forward to, but Federal Realty is hardly a high-risk turnaround play.
2. Moderate risk
That brings us to mall giant Simon Property Group (NYSE: SPG). The around 200 or so enclosed malls and outlet centers this REIT owns were hard-hit by the economic shutdowns, with the landlord forced to actually take some of its tenants to court in its effort to collect rents.
Moreover, the retailers most impacted by the pandemic were disproportionately the type you'd find in a mall. So Simon was definitely feeling the pain. To put a number on that, funds from operations (FFO), a REIT metric similar to earnings for an industrial company, fell 24% year over year in 2020.
Like with Federal Realty, occupancy will be an important issue, only it's even trickier here. That is because a mall is a complex property that requires careful curation so all of the stores complement each other. The business turnaround for Simon will likely be a multi-year effort. No wonder the dividend was cut roughly 40% in 2020.
However, Simon has a large portfolio of well-positioned malls and is one the strongest names in the sector operationally and with regard to its balance sheet. In fact, it used the downturn to strengthen its business, buying a competitor and investing with partners in select retailers.
This is very similar to what happened after the last big industry downturn. Note that the dividend increased from $0.60 per share per quarter to $2.10 during that recovery. It's starting from a much higher $1.30 per share per quarter this time around, but if history is any guide, dividend investors will be well rewarded as Simon works back from the current headwinds.
3. High risk
The last name here, EPR Properties (NYSE: EPR), is not for the faint of heart. This landlord owns experiential properties like amusement parks and movie theaters. The coronavirus pandemic was a devastating blow to its rent roll, given that its properties are purpose-built to bring people into group settings. At the end of 2020, it was still only collecting around half of its pre-COVID-19 rent roll. That's not a sustainable figure and helps explain why EPR has stopped paying dividends.
Worse, roughly half of its rents are tied to movie theaters. Operators in this space are struggling mightily, and thanks to the increase in content streaming during the pandemic, the movie industry may have permanently changed.
If movie theaters don't come back from these headwinds, EPR Properties will have a very difficult time of it. It is, basically, desperate for the recovery to play out as quickly as possible. That said, if the movie theater business comes back strongly, the REIT will likely see a huge rebound in its business. Investors here are crossing their fingers and praying that the big screen remains a big draw.
This too shall pass
In the end, the world will likely figure out a way to deal with the coronavirus, and so, too, will this trio of REITs. The one with the easiest path forward here is Federal Realty, as its largely grocery store-anchored strip malls offer access to necessities that get purchased regularly. And while Simon is a bit riskier, given that malls are tied more to discretionary purchases, it's proven it knows how to handle headwinds. The recovery will just take some time to play out, and that might unnerve some investors. EPR is facing the most prominent risk, since it isn't yet clear if its largest property type, movie theaters, will still be as important when the COVID-19 dust settles. There's huge recovery potential in its business, but also huge risk.