This pandemic and the economic shutdowns it’s prompted have been unprecedented.
There’s never been another time in history where the vast majority of the world – with one voice – has told businesses they couldn’t operate and people they couldn’t leave their homes like they normally would.
We’ve had plagues and wars before where some choose not to leave their homes or run their businesses. There have certainly been situations where disruptions have messed with even large populations’ pipelines and production, forcing people to close down until the situation changes.
But what we’re experiencing right now? And for months on end?
That’s not normal.
As such, you would think the economic damage done would be enormous. Perhaps even irreparable. And, to some degree – perhaps even a large one – you’d be right.
So far, individuals have lost fortunes, livelihoods, and even lives because of the efforts to handle Covid-19. Entire industries have also been brought to a screeching halt, from airlines, to oil producers, to sports and performing arts.
Yet, somehow, someway, real estate is expected to bounce back fairly quickly. Odd as that prediction sounds, we’re not going to argue against it if it’s true.
In fact, bring it on!
The “New Norm” Requires Revisions
By now, we all know we’re getting sick of seeing the same four walls around us 24-7 – which is essentially what most of us have been doing for months. Perhaps enough of us are sick enough of the status-quo that we’re willing to do almost anything to change the scene…
Even if it’s buying up a whole new set of four walls.
Plus, some people might be fine working from their couch all day. But many will want an actual office where they can put actual desks.
Regardless of the reasons, commercial real estate hasn’t done nearly as badly as it could have considering how open houses have become a thing of the past. And many are saying it will see a rebound soon enough.
For instance, according to Globe St.,
“Nearly 40 real estate economists and analysts feel the Covid-19 recession will impact real estate markets and values less severely than the 2008 financial crisis…
“The economists predicted there will be a $275 billion decrease in real estate transaction volumes in 2020, according to a survey in May by the Urban Land Institute. But they expected transaction volumes to rise over the next two years, which would create a healthier capital market compared to the 2008 Great Recession.”
“‘Real estate economists expect that, while the top-line economic impact of Covid-19 will be much worse than the global financial crisis, U.S. real estate market fundamentals and values will fare much better,’ said William Maher, a leading member of the Urban Land Institute, in prepared remarks. ‘Only retail and hotels are expected to suffer a worse outcome.’”
Nor is that just hopeful speculation.
REITs Worth Waiting For
In a May 24 piece that can also be found on Forbes, contributor Joseph Young wrote how, “Historical data from the late 1990s show a financial crisis is often followed with a steep increase in housing prices.”
So while, “The housing market is projected to see a steep sell-off in the second half of 2020”… and, “The medium-term trend of the housing market remains gloomy”… there are signs that indicate “the next correction will mark the start of a strong housing market recovery.”
Where there’s a strong housing market, there’s also room for other types of real estate – and real estate investment trusts – to grow. Shopping centers will be needed. Restaurants will be appetizing again. Advertising opportunities will abound. And the need for wireless networks will increase even more.
There’s actually plenty of opportunity to look forward to. That’s why I see good things in store for the following three REITs.
Although the Net Lease REIT sector has been beaten down due to Covid-19 (-31 percent YTD), we believe that the higher-quality names like Realty Income O will not only survive, but to thrive. This A-rated REIT has an extraordinary track record of paying and increasing dividends for over 27 years in a row and it appears that that record is intact.
In April the company collected around 83 percent of rent (average for the sector was 73 percent) and based upon the overall composition of the portfolio, Realty Income should have no problem in maintain its dividend as the economy begins to open back up again. The payout ratio was around 82 percent in Q1-20, leaving a healthy cushion as the company’s theater, gym, and restaurant tenants get back to normalized demand levels.
Given Covid-19 impacts, analysts forecast the company to grow modestly in 2020, by around one percent, and then normalizing to a more predictable range of 5 percent in 2021. Shares now trade at $55.70 wit h a dividend yield of 5 percent (Realty Income also pays monthly dividends).
Another growth play we like is Physicians Realty Trust, a “pure play” medical office building REIT that has 266 properties with a majority of tenants rated as investment grade credits. The diverse portfolio has no one MSA representing over 8 percent of leasable square footage or tenant responsible for more than 6 percent of annual base rent.
As economies across the U.S. begin to open back up, physicians are beginning to see patients again, opening up demand for services. In April the company collected 94 percent of rents, and May and June are likely to improve for the sector.
Physicians Realty also enjoys a payout ratio of around 90 percent that puts the dividend in a safe range. Analysts forecast the company to grow earnings (or FFO) of around 7 percent in 2020, providing strong support for dividend safety. Shares are now trading at $17.44 with a dividend yield of 5.3 percent.
Our last growth pick is STAG Industrial Inc., an industrial REIT with 456 properties and over 91 million square feet. The company listed shares in 2011 and transformed into a powerful portfolio with tenants such as Amazon AMZN , XPO Logistics XPO , Solo Cup, and Ford Motor Company F .
STAG has focused on secondary markets where it has limited competition (and least in the public REIT sector) and it can achieve favorable risk-adjusted returns. In April the company collected around 90 percent of rents and similar results in May. It’s likely that the company can negotiate deferrals for most of its tenants, so it can maintain a safe payout ratio (of around 90 percent).
Analysts forecast STAG to grow modestly in 2020 but the company should get back to its normalized 5 percent growth rate in 2020. Shares currently trade at $26.90 with a dividend yield of 5.4 percent (STAG also pays monthly dividends).
I own shares in O, STAG, and DOC.
Source: Forbes – Money