The year 2020 will be remembered most for the societal dislocations caused by the coronavirus pandemic. There's no doubt it was a difficult year, but some companies managed to use adversity to their advantage -- which is exactly why Realty Income (NYSE: O), Kimco (NYSE: KIM), Ventas (NYSE: VTR), and Simon Property Group (NYSE: SPG) will come out of this period better companies than when they entered. Here's how.
1. A giant gets even bigger
Real estate investment trust (REIT) Realty Income has a portfolio of around 6,600 single-tenant properties. Its tenants are responsible for most of the costs of the properties they occupy, which makes them net lease assets. It's a relatively low-risk approach in the real estate sector, as well as a common tactic, but Realty Income's size makes it something of a bellwether name in the niche.
The company recently announced plans to buy peer VEREIT (NYSE: VER) in an all-stock deal that will expand its portfolio to over 10,000 properties. The acquisition is expected to be 10% accretive to adjusted funds from operations (AFFO), but more importantly, it gives Realty Income even more clout in an industry where scale has major advantages.
Most notably, it will allow the investment-grade rated REIT to take on deals that others couldn't even consider. While increasing in size means that larger deals are needed to move the needle, Realty Income's new scale will give it an unmatched ability to grow in a post-pandemic world.
2. Reach for the Sun Belt
Shopping center REIT Kimco is going down the same road, buying peer Weingarten Realty (NYSE: WRI) in a stock and cash deal. Kimco's portfolio of grocery-anchored centers will expand from roughly 360 locations to around 500. There are multiple benefits to this transaction above the cost savings from consolidating operations.
Most notably, the new properties will expand Kimco's reach in Sun Belt regions, where population growth is expected to be stronger in the years ahead. And the combined company will have material internal-growth opportunities via redevelopment projects. Basically, the company is improving the fundamental core of its business. Like the Realty Income deal, Kimco expects its acquisition to be accretive to its results. Kimco is, effectively, getting bigger and better.
3. Doubling down
It would be hard to suggest that diversified healthcare REIT Ventas is doing as well as either Realty Income or Kimco right now. In fact, the company's senior-housing assets, a significant percentage of which it both owns and operates (known as SHOP assets), are struggling badly, thanks to the impact of the pandemic. However, that hasn't stopped Ventas from using the downturn to its advantage, inking a deal to buy New Senior Investment Group (NYSE: SNR) in an all-stock transaction.
What's interesting about this move is that it increases Ventas' exposure to senior housing at a time when others are fleeing the sector, most notably Healthpeak. By adding New Senior's 109 properties to its portfolio, Ventas will increase the size of its SHOP business from 26% of its adjusted net operating income to 31%. Although the idea of doubling down on the division that has been hit hardest by the pandemic sounds risky, there are long-term demographics to consider.
First, older adults need more help, and that help can be provided most effectively in a group setting. Second, with more baby boomers retiring every day, senior housing looks set to see increasing demand over the next couple of decades. Ventas believes the industry has passed the worst of the pandemic hit and is acting on its convictions -- if it's right, this healthcare REIT will be poised for a huge rebound.
4. Buying more of the best
Mall giant Simon Property Group is another name that's been hit pretty hard by the health crisis. However, like the three names above, it has been working on getting better so that it exits the pandemic in stronger shape than when it entered.
The company is doing this in two ways. First, it completed a deal to buy rival Taubman Properties' high-end portfolio of malls similar to what Simon already owned. This increased Simon's scale and reach at the top end of the mall sector. The company used the pandemic to get a better deal.
Second, Simon has been working with partners to buy troubled retailers like J.C. Penney and Brooks Brothers, among others. While this is something of a step outside the normal aspects of a mall REIT, the company is using its financial strength to acquire notable retail brands on the cheap.
The move will help keep Simon's malls occupied and allow it to benefit if, or perhaps when, the retail sector rebounds more broadly. Like all the names above, the company has used the downturn to improve its long-term prospects.
Acting at the right time
It's not easy to make big decisions when the world is in disarray, like during a global pandemic. Many companies simply hunker down and try to survive. But Realty Income, Kimco, Ventas, and Simon all took a different route, inking deals that should help them exit this difficult time in stronger shape than when they entered it.
While it's too soon to suggest that all these deals will work out as planned, if they come anywhere near doing so, investors will be glad that these REITs acted when they had the opportunity -- even though that meant making potentially risky moves in a stressful period of time.