STORE Capital: Not your typical retail REIT
STORE Capital primarily invests in retail properties, but they aren't in the same category as malls and shopping centers. Specifically, STORE Capital owns single-tenant properties that are net leased to tenants that operate service-based or other types of retail businesses.
Here's the general thesis: A net lease is a form of commercial lease that comes with a long lease term (usually at least 15 years) and requires the tenant to pay taxes, insurance, and maintenance. In short, it's designed for predictable and growing rental income. And STORE Capital's tenants are in businesses that are not easily disrupted by the e-commerce headwinds that are hurting so many mall-based retailers. To name a few examples, businesses like restaurants, pet care, and lumber wholesale are virtually impossible to replicate online.
To be sure, some of STORE's tenants have been hit hard by the pandemic. I already mentioned restaurants, but STORE also owns a significant amount of movie theater, family entertainment, health club, and child care properties, all of which combine to make up about one third of the portfolio. But the reality is that virtually all of the company's properties have reopened, rent collection is at 90% of normal levels, and most tenants should be just fine going forward.
Physicians Realty Trust: A recession-proof business with lots of room to grow
Physicians Realty Trust's mission is to build and operate a portfolio of high-quality medical office buildings, most of which are leased to top-notch health systems. Just to name a few examples from its current portfolio of 268 properties, top tenants include University of Louisville Health, Baylor Scott & White Health in Texas, and Northside Hospital in Georgia.
Of the three REITs discussed here, I'd consider Physicians Realty Trust to be the safest -- not just in terms of the pandemic but in recessions and other adverse conditions as well. Medical offices are about as essential of a business as you can find, and healthcare is something people need no matter what the economy is doing. In the second quarter, Physicians Realty Trust collected virtually all (98%) of its rent, something few other REITs can say.
And just because this is the safe play doesn't mean there's no growth. In my recent interview with CEO J.T. Thomas, he estimated that Physicians Realty Trust has more than $250 billion worth of properties in its addressable acquisition market.
American Campus Communities: Students want to be on campus
American Campus Communities isn't exactly thriving in 2020. While most of its target universities are open for on-campus instruction, many are not -- either choosing to use a hybrid instructional model or delivering classes exclusively online for the fall 2020 semester. As a result, American Campus Communities' same-store occupancy at the end of September was 90.3%, far below its 97.4% occupancy at the same time in 2019. As a result, revenue for the third quarter was 14% lower year over year.
With all of that in mind, there are still some good reasons to invest. For starters, the market opportunity remains huge. In American Campus Communities' target markets, the existing housing supply largely consists of outdated on-campus housing and standard apartment communities, not purpose-built student housing. Its properties are superior to and cheaper than the existing on-campus options in most cases, so the product essentially sells itself. Plus, several of the universities that remained online-only in the fall are planning to reopen for the spring semester, which should help lease up the vacant properties.
Finally, with more than $760 million in liquidity, American Campus Communities should have no trouble making it through the tough times, even if the current low occupancy lasts until next school year.
Expect some turbulence
As a final thought, all of the dividends paid by these REITs should be safe, and all three companies should be just fine long term. But as the COVID-19 pandemic continues to play out, it's wise to expect quite a roller coaster ride.