2020 hasn't been kind to real estate investment trusts (REITs) so far. While most of the broader market has recovered from the epic sell-off in March, many in the real estate market are still languishing at those lower levels. Three companies in particular -- retail REITs Kimco Realty (NYSE: KIM) and Tanger Factory Outlets (NYSE: SKT) and healthcare property giant Welltower (NYSE: WELL) -- are down 44%, 55%, and 38%, respectively, in 2020 as of this writing.
Is the market overly concerned with the challenges that these companies face during the novel coronavirus outbreak? Or, are the impacts to their business enough that things could get worse from here? Let's take a look at why these companies have seen their shares drop so much this year and whether it makes for a buying opportunity
There's no way to sugarcoat the fact that only 58% of Kimco Realty's tenants were able to meet rent in May. While rent payments improved for its essential retail and restaurant tenants, its other retail tenants continued to deteriorate. The only thing worth pointing to as a good sign is that most of its tenants are essential retail such as grocery stores, home improvement retailers, and discount centers. As a result, only 16% of annual base rent deferrals were granted in May.
The other concern that investors might have about Kimco Realty right now is that its balance sheet is only OK. While its total debt-to-capital ratio looks reasonable at 54%, its debt-to-EBITDA ratio of 7.2 times is high enough to make an investor squirm a little. A ratio that high suggests that the company's earnings power isn't quite enough to meet its requirements and that its ability to tap the debt market could become troublesome.
For now, though, it appears Kimco is still able to raise funds and has adequate cash to see it through. Just last week the company was able to raise $500 million in so-called green bonds that will be used toward "the development and acquisition of green buildings, energy efficient building upgrades, installation of sustainable water and wastewater management systems, and the development of renewable energy." Those bonds came with a modest 2.7% coupon rate. In addition, the company still has about $900 million in cash on hand and an equity interest in grocery retailer Albertsons Companies (NYSE: ACI) worth about $625 million.
So by no means is Kimco Realty at serious risk of being in financial trouble. Its portfolio of essential retail tenants and access to capital are enough to see it through big issues. That doesn't necessarily mean the company will be able to maintain its growth plans and get back to paying a high-yield dividend, though. So while investors may not have to worry about it going under, it's hard to know what value it can deliver to its shareholders right now.
Tanger Factory Outlets
Back in June, it appeared that Tanger's outlet shopping centers were doing rather well considering the circumstances. In a press release, it said that its May traffic was 90% compared to the previous year. Under any other circumstances that would seem terrible, but retail outlet malls with few essential retail options in the midst of shutdowns getting back to that level of normalcy seems rather impressive.
Also as part of that update, the company announced it had negotiated with its short-term lenders to ease some of the covenants on its debt to offer it some additional leeway to manage the crisis. That is critical because the company has drawn all but $100 million on its short-term credit lines. At the time of the press release, it had about $433 million in cash on hand.
That was a month ago, though, and a lot has changed since then. Several states have been reporting sharp increases in cases, and some states such as California have started to reimpose stricter guidelines to control the outbreak. Although Tanger's facilities are outdoor, open-air malls, that may not be enough of a distinguishing factor for state governments to keep them open.
Tanger expects to report its second-quarter results on August 5. With so much in flux related to business closings and Tanger's smaller cash reserves, it may be worth waiting until it reports earnings or gives another investor update to get an idea of the financial impact these past couple of months have had and where they could be going from here.
One of the reasons Welltower has suffered more than other healthcare REITs is that it has high exposure to senior living facilities. Over 80% of its 2019 net operating income came from either directly operated senior housing facilities or properties managed by other operators with triple net leases. Throughout this coronavirus outbreak, senior living and nursing homes have been some of the most impacted communities.
Welltower has done a commendable job of mitigating the spread at its facilities. As of its most recent update in June, 87% of its operated facilities had no reported cases over the prior two weeks and 8% of those facilities had one to three total cases.
That hasn't stopped the decline in occupancy, though. From March to the end of May, total occupancy rates dropped 3.9 percentage points to around 81% as move-ins to facilities declined 79% year over year. Management also said that its triple-net tenants were also experiencing similar changes in occupancy rates and that rent collected from those tenants was 94% of what was billed.
This isn't great news, but management has made a lot of proactive moves to bolster its balance sheet and manage its cash flow. One of those moves was to cut its dividend by 70%. According to management, the cash saved from the lower payout is enough to cover 80% of interest expenses. It also completed the sale of some properties that will give it about $1.25 billion in cash on hand with its $3 billion credit line. With management only expecting to use about $588 million to complete outstanding development work and pay off maturing debts, there is plenty of cash runway to see it through for at least the rest of the year.
After the drop in Welltower's stock price, its lower dividend payout currently yields 4.9%. This company is likely going to take some lumps in the short term until seniors feel safe enough to move into its facilities. That said, it has a strong balance sheet and management has been very proactive in managing the situation. Of the three companies here, this looks like the best option.