It has certainly been an interesting summer for real estate investment trusts (REITs). As the U.S. economy began to reopen in June, many of the hardest-hit REITs posted near-explosive gains, only to crash back toward the spring lows as hopes of the pandemic coming to a quick end evaporated.
Now that summer is coming to an end, the pandemic is still raging on but REIT volatility has dropped significantly. And while there is certainly light at the end of the tunnel with several promising vaccine and treatment candidates, there are still some excellent bargains to be found for patient long-term investors. Three in particular that could be appealing to value-seeking investors are Empire State Realty Trust (NYSE: ESRT), Simon Property Group (NYSE: SPG), and Ryman Hospitality Properties (NYSE: RHP).
Buy the Empire State Building at a discount
Empire State Realty Trust owns the iconic Empire State Building as well as a portfolio of mostly office properties in the greater New York City area. Its stock price has been beaten down tremendously this year -- while its rent collection rate isn't exactly a cause for alarm, many New York offices remain closed and (more importantly) many businesses have transitioned to a work-from-home model with no end in sight. There's significant fear that expensive urban office space will become a thing of the past and companies like Empire State will have to make some serious rent concessions to keep occupancy high.
However, these fears are likely overblown. While the tech-heavy Silicon Valley market may certainly take a permanent hit, New York City will remain a desirable destination to live and work. Facebook (NYSE: FB) just signed a lease for 730,000 square feet of office space in the city, and Starbucks (NASDAQ: SBUX) signed a lease since the pandemic began to build a massive location -- presumably one of its roastery locations -- in the Empire State Building itself.
This isn't the first time analysts were calling for the end to urban office buildings -- for example, it was widely thought that nobody would want to work in iconic buildings like the Empire State Building after the 9/11 attacks. Empire State Realty Trust will get through this crisis, and thanks to its rock-solid balance sheet, it could even find some opportunities in the meantime.
People want to get out and shop
Sure, e-commerce has been an explosive growth market for the past decade or so, and the COVID-19 pandemic accelerated that trend. However, don't think for a second that people are going to rely on the internet for all of their shopping needs. Anyone who has been to one of Simon Property Group's malls recently knows they aren't exactly ghost towns -- in fact, I was at a Simon mall in Florida recently and had a tough time even finding a parking spot.
Some retailers are certainly struggling. Department stores and several once-great retail chains have declared bankruptcy or are on the cusp of doing so. But Simon's malls are different. The company creates shopping destinations with the most popular dining options, entertainment venues, and other non-retail elements to complement its traditional mall offerings. And that's not to mention that Simon is actually buying some of the bankrupted retail brands itself, and at fire-sale prices.
In short, I could see a similar phenomenon occurring with Simon as we saw with Best Buy (NYSE: BBY) a few years ago. E-commerce disruption had convinced many investors that Best Buy was destined to fail -- but the company modified its properties to thrive in the new retail environment, while lesser competitors like Circuit City and hhgregg died off, leaving their market share to the last electronics giant standing. The same could happen in the mall industry, to Simon's benefit.
Pent-up demand for large-scale events
Conferences, conventions, concerts, and other group events simply aren't a thing right now. So, a company that owns group-focused hotels and concert venues must be struggling, right?
In the short term, you'd be correct. Ryman Hospitality Properties is a REIT that owns the five large-scale Gaylord hotels, which are some of the largest hotels in the U.S. in terms of meeting space, as well as iconic entertainment venues Ryman Auditorium and the Grand Ole Opry.
Not surprisingly, most of Ryman's conferences and conventions scheduled for 2020 have been cancelled. However, it's important to keep in mind that the group event business is a "sticky" one -- that is, the same groups tend to host events at the same venues year after year. Ryman has millions of future room nights on the books and has successfully rebooked nearly half a million cancelled nights. And what's more, the company's concert venues are beginning to host live shows in September, months before most analysts would have expected.
Be patient with these
REITs in general aren't great investments if you want quick returns. While many REITs offer steady income, their share prices can fluctuate dramatically from month to month and year to year, and often for reasons that have little to do with the underlying business.
This is especially true when it comes to these three. None of these are particularly great businesses to be in during the pandemic, and it will take some time afterward to know the true economic effects. However, all three are excellent long-term plays -- New York City will still be a highly desirable place to live and work, top-notch shopping destinations will continue to attract consumers, and demand for group events isn't going away from a long-term perspective. So, don't expect them to go straight up, but investors who buy and hold on to these REITs could be handsomely rewarded a few years down the road.