Real estate was one of the hardest-hit sectors of the stock market as the COVID-19 pandemic spread throughout the world, with the Vanguard Real Estate ETF (NYSEMKT: VNQ) plunging by as much as 43% from its pre-pandemic highs at the March lows.
Since that time, the rebound has been extremely impressive, with the sector recovering most of its losses for 2020. However, there are some real estate investment trusts (REITs) that are still cheap, especially for patient long-term investors. Here's why American Campus Communities (NYSE: ACC), Realty Income (NYSE: O), and EPR Properties (NYSE: EPR) should be on your radar as summer comes to an end.
A massive market opportunity
It's not hard to see why American Campus Communities is down by 24% in 2020. The REIT focuses on student housing, and college isn't exactly "normal" right now. Some universities have chosen (or been forced) to pivot to online instruction, and others are using a hybrid model.
However, there are two things to keep in mind. First of all, American Campus Communities' business has held up quite well. Most of its target universities are open for in-person classes, and the portfolio was more than 90% pre-leased by mid-July, just over 3% lower than the pre-leasing rate at the same time in 2019.
Second, and more importantly, this is a temporary problem. Students want to be on campus to learn. And the purpose-built student housing industry is still in its relative infancy. So, while there may be some turbulence as the 2020-21 school year goes on, this is still a pioneer in a high-potential industry whose product virtually sells itself.
Cheaper than it deserves to be
I've referred to Realty Income as the best overall dividend stock in the entire market, and I still feel that way. The company has made more than 600 consecutive monthly dividend payments and has increased the payout for 91 consecutive quarters. With a 4.37% yield and a fantastic record of market-beating total returns, Realty Income investors have fared quite well over the years.
If you aren't familiar, Realty Income invests primarily in single-tenant properties occupied by recession- and e-commerce-resistant retailers. Think convenience stores, drug stores, warehouse clubs, and similar businesses. Tenants sign long-term leases and agree to cover property taxes, maintenance, and insurance -- all the variable costs of owning real estate. All Realty Income has to do is put a tenant in place and enjoy decades of predictable, growing income.
The vast majority of Realty Income's tenants have been open for business throughout the pandemic, and the company collected 93.5% of its contractual rent in August and is in active discussions with tenants regarding the majority of unpaid rent. In short, this is a rock-solid company that doesn't deserve to be trading for 12% below where it started the year.
An excellent risk-reward profile
EPR Properties is hands-down the riskiest of the three REITs mentioned here. The company owns a portfolio of experiential real estate, such as waterparks, golf attractions, and ski resorts, just to name a few. Virtually all of these were forced to shut down as the pandemic began, and while currently open, they aren't exactly back to normal just yet.
However, the most concerning part of the portfolio is the 45% of rental income that comes from EPR's top property type -- movie theaters. The movie theater industry is just starting to get back to business, and some of the major operators, including EPR's top tenant AMC Entertainment (NYSE: AMC), are having serious financial difficulties.
With that in mind, there is reason to be hopeful. The company recently restructured its AMC leases in a way that helps both parties. And the key point is that EPR has enough liquidity to sustain its operations for six years, even if the second-quarter rent collection rate persists. With a share price that's more than 50% lower than where it started 2020, EPR's risk-reward profile makes a lot of sense for patient long-term investors with a high risk tolerance.
Three very different investments
As a final thought, these are three very different REITs that have very different risk profiles, especially while the COVID-19 pandemic is ongoing. Realty Income is a rock-solid company that has very little uncertainty, while American Campus Communities has no reason for investors to have serious worries but could be volatile as the pandemic plays out. And EPR is essentially treading water right now, with a full recovery likely to take a long time.
So, while I believe long-term investors will be just fine with any of these three stocks, do your own due diligence and make sure whatever REITs you choose are a good fit for your investment objectives.