What happened
Shares of mall-focused real estate investment trust (REIT) Macerich (MAC 1.59%) jumped as much as 13% in early trading on June 8. Hotel landlord Park Hotels & Resorts (PK 3.19%) rose 13% or so, too, and mortgage REIT Granite Point Mortgage (GPMT 1.90%) was up 21%. By 11 a.m. EDT, each had given back at least some of those gains, but the trend across the board lately has definitely been for higher prices.
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Some perspective is in order. All three of these real estate investment trusts lost at least 75% of their value earlier in the year. Today, Macerich is down 55% for the year, Granite Point 51%, and Park Hotels & Resorts 44%. In other words, even before the gains on June 8, this trio had made up a lot of ground. And yet, they're still way off their early-year highs from before COVID-19 started to spread around the globe.
So what
At first blush there's little similarity between malls, hotels, and mortgages. But, in the wake of the efforts to slow the spread of COVID-19, all three have found their business models under extreme stress. These subsectors are among the riskiest areas of the REIT space today.
Mall owner Macerich had to deal with all of its properties being shut down because they generally house non-essential businesses, and malls are gathering places in which the coronavirus could potentially spread. Many of its tenants stopped paying rent and the REIT was forced to cut its dividend by 33% and chose to pay 80% of the lowered dividend with shares of stock instead of cash. In other words, the cut feels a lot deeper than it looks for dividend investors who use the income their portfolios generate to pay living expenses.
Hotel owner Park Hotels & Resorts got hit because travel came to a virtual standstill on both the business and consumer fronts. With effective lease lengths of just one night, hotels are among the first to be impacted by economic shifts. Park paid its first-quarter dividend, but suspended dividends for the rest of the year as occupancy levels sharply declined.
Granite Point is a bit different, but no less impacted by the coronavirus. As its name implies, the company doesn't own physical property, it makes and owns mortgage loans. Mortgage REITs generally use leverage, backed by the portfolio of mortgages they own, to augment returns. Only, leverage works on both the upside and downside. During the COVID-19 scare, property values have become difficult to gauge, with some fearing that the underlying value of the properties backing mortgages may have fallen dramatically. If that's the case, then mortgages could be worth more than the properties they're tied to. Equally as bad, with the shutdowns related to COVID-19, properties may not be able to generate enough rent to cover the mortgage payments. Either way, a property owner might not be able to, or want to, keep current on their mortgage payments. Although that hasn't come to pass for Granite Point, with all but one loan still current when it reported first-quarter earnings, the REIT still suspended its dividend before paying anything out to shareholders in 2020.
Wall Street, however, tends to look forward, and the deep fears surrounding COVID-19 that were the driving force in the market earlier in the year are starting to wane. Non-essential businesses are being allowed to reopen. Social distancing restrictions are being softened. Life is, slowly, starting to move back toward a pre-coronavirus normal. That has investors upbeat about some of the very REITs they were most concerned about not too long ago. To be fair, there are good things starting to happen and a more positive view is likely warranted. However, that doesn't mean that there aren't still very real risks to be worried about.
Malls still need to deal with higher costs for things like cleaning and need to get consumers back through the doors. And they also need to figure out what the fallout is on their retailer lessees, which have been struggling with massive top-line shortfalls during the shutdown. Hotels, meanwhile, aren't likely to see a robust recovery until people start to travel again, which seems like it will be a slow process. Business travel is highly tied to meetings and conferences (neither of which are currently high on anyone's list to attend), and destination-based leisure travel (another category that's likely to see a slow return). Costs will likely rise for hotels, as well. Of the three, mortgage REITs might be the quickest to see their basic business model turn around, but the leverage issue complicates the story in a material way. All it takes is a little bit of adversity, and debt can switch from a benefit to an unmanageable burden. It's still too early to tell which way things are going.
Now what
The three names here were selected because they represent specific REIT niches. It looks like the big-picture story here is that investors have decided to take a risk-on attitude toward investing today and, frankly, over the last week or so. Honestly, there are some very good reasons to think the future will be better than the recent COVID-19 related past. However, long-term investors should tread carefully. These REITs, and the sectors they represent, are still a long way from their pre-coronavirus normal. And it could take a long time before they actually get there.
