Re-Examining REITs at Half-time 2020

by Ben Kfoury, with Alex Talcott

Recent months of market turbulence have troubled sectors across the investment universe. Real Estate has been hard hit with large losses by many measures. Nareit’s FTSE all-REITs index is down 16.7% year-to-date (of draft) and is still showing sluggish recovery. At the dawn of the calendar year (months pre-pandemic), the popular personal finance publication Kiplinger chose 10 real estate investment trusts they believed would be the best performers in 2020, all of which have lost nearly 50% of their value. With REITs a financial-advisor-familiar selection to mitigate market risk in a portfolio given their tendency to not move in the same direction as the broad market and availability – albeit limited – on brokerage platforms, many should ask the question: why should an investor allocate capital in REITs right now (or ever) after all of Kiplinger’s picks got annihilated in the March sell-off and have yet to show signs of stability. 

The COVID-19 crisis has caused an unforeseen colossal shift in commercial real estate. Stay at home orders have moved the workforce into a virtual world. This transition has made companies realize that their office space may be an unnecessary expense. Office REITs have lagged the average real estate investment trust over the trailing 12 months and have lost 25.49% year-to-date. Kiplinger’s pick Boston Properties (tkr: BXP) has lost 50% of its value YTD and missed on Q2 earnings by nearly $10 million. Boston Properties owns over 50 million square feet and currently has 13 properties under construction. Work-at-home headwinds could be detrimental to Boston properties and similar office REITs over the next few months killing returns in this REIT subsector. 

Like office space, apartment REITs were impacted negatively, 19.26%. Equity Residential Properties Trust (tkr: EQR), another one of Kiplinger’s losing picks, is down 20.75% and has an adjusted Q4 FFO estimate of -7.87%. As a comparison over the same time horizon, the S&P 500 has gained 4.03%. Equity Residential’s portfolio consists of 300 upscale rental properties in many major cities that are COVID-19 hot spots such as Boston, New York, and San Francisco. Mid-America Apartment Communities (tkr: MAA) is another apartment real estate investment trust suggested by Kiplinger that has a large portfolio totaling 100,000 units over 16 different states. Mid-America is one of the largest apartment REITs and is well diversified. However, they too are tuning down Q4 2020 estimates of FFO to a mere -6%. EQR and MAA both pay respectable dividends of 4.18% and 3.6%. [Looking at comparable equity investments with good dividend discernment, an investor could look at a company like Johnson & Johnson (tkr: JNJ), which posts quarterly dividends yielding 2.87% with consistent increases since 1990.] 

Industrial space REITs are down 1.61% year to date and have been riding the wave of trends towards e-commerce. The question to pose around the industrial subsector: how long robust online sales will persist? In our current economic environment, e-commerce may ‘make sense’ to many individuals. However, as stay-at-home orders are lifted, consumers will undoubtedly return to brick-and-mortar to an extent to buy goods and online e-commerce will see incident-inflated online sales return to normal rates. Duke Realty (tkr: DRE) leases buildings needed for complex logistical systems is up 9.90% over the past year but has solely relied on e-commerce as a growth catalyst. Prologis (tkr: PLD) up 15.32% in the past year is like Duke Reality but operates on a larger scale leasing space globally with customers including Amazon. Although Prologis’s price has appreciated, its dividend has compressed, leaving it yielding 2.3%. 

credit: Touzi Capital

Retail and Lodging/resort subsectors are down 37.76% and 41.15% YTD clearly leading the pack of losing REITs. Shopping centers and malls who were already in trouble pre COVID-19 crisis are now in deep financial ruin. Mall giant Simon Property Group terminated its $3.6 billion deal to buy Taubman Centers due to the impact of the pandemic. Suggested by Kiplinger Realty Income (tkr: O) “The Monthly Dividend” lost over 50% in the March sell-off. The road to recovery is long for the retail industry and even longer in the case of shopping malls. The lodging and hotel industries have been obliterated by the pandemic leaving rooms, resorts, and pools vacant. Las Vegas and casinos around the country were set to open late last month, at minimum capacity. W.P. Carey (tkr: WPC) and Site Centers (tkr: SITC) are two other selections made by Kiplinger that have seen declines. 

All the REITs excoriated above were on Kiplinger’s: The 10 Best REITs to buy for 2020. The alternative to REITs as an alternative investment that accesses real estate exposure – and favors directness to diversification, returns to risk – is an actual commercial real estate venture.

Ben Kfoury is a REIT Analyst for the Atkins Investment Group, a student organization at the University of New Hampshire (UNH) Peter T. Paul College of Business and Economics, where he is an undergraduate business administration major with dual options in finance and business analytics, on quantitative finance and real estate tracks. Alex Talcott, J.D., teaches finance and business law at UNH.