Large Q4 Rebounds Shrink 2020 Losses For REITs
News of an effective vaccine sent prices soaring in November for companies with holdings in the retail and hospitality sectors, but still well short of where they began the year. Office and multifamily-focused REITs also declined significantly at the end of February but their recovery has been less dramatic, perhaps because questions remain about how long the coronavirus pandemic’s effects could last.
“The stock prices and valuations [for multifamily and office] are building in some risk that there are permanent changes to consumer behavior,” Nareit Executive Vice President of Research John Worth told Bisnow. “In office, it’s more a question of if there will be more work-from-home. And if there is more working from home, does that diminish the appeal of downtown apartment living? And that’s where multifamily feels the effects.”
Shares in office REITs overall have gained 20% in the fourth quarter so far, according to the FTSE Nareit U.S. Real Estate Index Series Daily Returns, but remain 16% lower than they were at the start of the year. Since Feb. 21, when the stock market began responding to the pandemic, office REITs have seen the value of their equity decline by about 28%, worse than every other sector aside from shopping malls as of Dec. 9, according to Green Street Advisors data.
Contributing to its ignominious place in the rankings is the fact that office REIT equity has only gained a shade under 40% of value since markets began rebounding on March 23, the third-worst rate among all sectors Green Street tracks. By comparison, hospitality REITs have lost 15% of equity value since Feb. 21, aided by a nearly 80% gain in the same category since March 23.
By those measures, investors may be looking at the eventual clearing of the pandemic clouds as the release of a massive buildup in tourism demand, held back by safety concerns.
“In my own household, as vaccine news came out and has improved over time, the amount of time that my wife and I spend thinking about potential vacation plans for next summer and fall has grown exponentially, and I don’t think we’re alone,” Worth said.
Using total returns as a measure, hotel REITs have still lost about 8% more value since the start of the year than office REITs on the whole, according to Nareit data. The best-performing hospitality REIT this year has been RLJ Lodging Trust, which owns hotels operated by multiple brands across the country and has only had an 8.6% decrease in unlevered returns since Feb. 21, according to Green Street, which considers unlevered returns a more accurate measure of the market’s perception of a company’s outlook than share price.
Since March 23, RLJ’s unlevered returns have grown by 58%, more than twice the rate of any office REIT and at least 25% more than any multifamily REIT.
Multifamily REITs have gained 14% value so far in Q4, but have lost 15.7% of their value since the start of the year, according to Nareit data. AvalonBay Communities, the largest multifamily REIT in the country based on market capitalization, has experienced a 19% drop in unlevered returns since Feb. 21, according to Green Street data.
As of Dec. 15, retail REITs suffered a 23.6% decline in value from the start of 2020, with regional mall REITs dragging the sector down with a 34% drop in value and free-standing store owners pacing the group with only an 11% loss from Jan. 1, according to the Nareit report. Without a 41.6% increase in value over the fourth quarter so far, shopping mall REITs would be in a truly dire position.
The largest mall REIT, Simon Property Group, has seen a 19% decrease in its unlevered returns from Feb. 21, according to data from Green Street. But because it has the lowest debt-to-value ratio of the four largest mall REITs, it has lost 39% of its value since the year began, compared to a 57% value loss for The Macerich Co., for which unlevered returns have decreased by 12% since Feb. 21.
Even with all of those losses, only a couple of small REITs have actually gone bankrupt this year in what amounts to a validation of the cash-hoarding strategy so many of them had employed heading into 2020.
“We saw REITs coming into this year with very conservative balance sheets, access to lines of credit, and that allowed them to withstand the very difficult early period, where we saw rent collection decline precipitously across property types and saw 90% of hotels closed,” Worth said. “The things that REIT managers did to prepare their companies really paid off in terms of getting through a difficult period.”
The sectors that have not had their business models fundamentally disrupted by the coronavirus have made unsurprising gains this year — industrial REITs have seen a 10.8% increase in total returns, single-family rental REITs have returned 5% gains and data center REITs have grown their returns by 15% since the start of the year, according to Nareit. Alexandria Real Estate Partners, the only life sciences-focused REIT tracked by Green Street, has increased its unlevered returns by 2.9% since Feb. 21.
With so much disruption early in the year, it could be instructive to look back at how 2020 began for REITs in order to evaluate where the safest bets are once the pandemic is over with. Logistics, data centers, single-family rentals and life sciences were all experiencing healthy growth before the coronavirus hit U.S. shores, Worth said, and shopping malls were already facing major headwinds. Office, multifamily and hospitality will all depend on a swift return to normalcy.
“The big question for investors now in real estate and outside of it is how much of the new post-COVID normal is like the old normal,” Worth said. “My own take based on what we’ve seen in economies around the world with few COVID cases is that people have gone back to normal ... Clearly people want to go back to normal quickly. This year in Europe and the U.S., it was maybe too quickly, but once we get the vaccine, I think people will show up at all those places.”