Real estate has been a major laggard during the COVID-19 pandemic, but that has produced many potential bargains for patient long-term investors. Here are three high-dividend real estate investment trusts (REITs) in particular that you might want to put on your watch list as we enter the fourth quarter of 2020.
The right kind of retail
While many investors are understandably hesitant to put money into the retail sector, STORE Capital (NYSE: STOR) is a REIT worth considering.
STORE Capital primarily invests in freestanding properties occupied by service or retail tenants that aren't typically recession-prone and that aren't easily disrupted by the e-commerce headwinds that have led to a wave of bankruptcies in the industry. However, that's not to say that its tenants are immune to pandemics -- specifically, about a third of STORE's properties are occupied by hard-hit industries like restaurants, family entertainment centers, movie theaters, gyms, and day cares.
Not surprisingly, STORE's rent collection rate dropped significantly in April and May, and the stock took a beating. However, there are a few things that are important to know. First off, STORE still generated more than enough funds from operations (FFO) to cover its dividend, even during the turbulent second quarter. Second, virtually all (98%) of STORE's properties are now open for business. And finally, STORE has collected at least 87% of its contractual rent each month during the third quarter. In short, this high-yielding REIT will be just fine, and now could be a smart time to get in while it's still trading at a discount.
A resilient type of commercial real estate
Healthcare real estate is perhaps the most resilient type of commercial property to own in a recession, and even during a pandemic. Not only is healthcare an essential service that is needed in good economies and bad, but it's a growing market -- the older segments of the U.S. population are aging rapidly, and the need for healthcare will be on the rise for decades to come as a result.
Healthpeak Properties (NYSE: PEAK) is one excellent way to invest, as it takes a diversified approach. Roughly one-third of its assets are medical offices, which have largely done just fine during the pandemic, and the same can be said for the third of the portfolio invested in life science properties. Healthpeak reports collecting virtually all of its contractual rent for these portions of the portfolio.
The last component to Healthpeak's strategy – and the main reason the stock is trading 18% lower for the year – is senior housing. For obvious reasons, senior housing isn't a great place to be. Of Healthpeak's 216 senior housing properties, it had confirmed resident COVID-19 cases at 125 and deaths at 71. Move-in activity and total occupancy is way down from last year, as you might expect, and it could take some time for the industry to recover. But the long-term demographic trends still make senior housing a good place to invest, and Healthpeak's diverse approach could be a great way to do it.
A long-tailed growth runway
Student housing REIT American Campus Communities (NYSE: ACC) is down by more than 20% this year, and it's not hard to see why. Colleges closed throughout the United States as the COVID-19 pandemic spread across the nation, and even in the Fall 2020 semester, many schools remain closed and some students at schools that are open have chosen to wait it out. To be fair, the company has certainly been affected. As of September 11, 90.3% of the company's housing units were leased, a significant decline from 97.4% occupancy at the same point in 2019.
However, occupancy above 90% is still quite strong in the current environment, and it's worth remembering that some colleges that closed for the Fall may deliver in-person instruction in the spring, which could provide a nice tailwind in the second quarter.
And more importantly, don't lose sight of the long-term opportunity. American Campus Communities pioneered the purpose-built student housing industry in the 1990s and still has tons of room to grow. And this is a product that virtually sells itself -- it's comparable in price to the outdated on-campus housing in its target markets (even cheaper in many cases), and it provides the modern amenities students want.
Great long-term opportunities
As a final thought, I want to emphasize that I have no idea what these REITs will do over the next week, month, or even year. There are simply too many factors that can move these REITs' prices over the short run. However, for patient long-term investors, these should be excellent REITs that can produce growth and income for years to come.