The year 2020 has wreaked havoc on the real estate industry. With many in-person interactions shuttered or severely restricted, landlords have lost rental income and have had to negotiate rent extensions while tenants navigate the coronavirus pandemic.
In spite of the uncertainty in the sector right now, I scooped up shares of two real estate investment trusts (REITs), STORE Capital (STOR +0.00%) and Welltower (WELL +0.12%), in April and May when shares were trading at a discount.
COVID-19 is far from beaten at this point, but these two REITs remain on my radar for potential additional investment.
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1. STORE Capital: A big rally in second-quarter results
Shares of single-tenant commercial property owner STORE Capital were growing fast and flying high headed into March 2020, but unit prices of the REIT took a nearly 60% haircut at one point. In April, STORE was able to collect 68% of base rents, with the rest being deferred, or reach some other sort of agreement during the worst of the economic lockdown.
But by July, that figure had improved to 85% collection of base rent as some 92% of its properties were open and operating in some capacity again. It certainly doesn't mean STORE is completely out of the woods just yet. As a percentage of base rent, 13.6% of the portfolio relies on restaurants and 4% on movie theaters -- both of which have been hit especially hard and have uncertain futures. An end to the pandemic sooner rather than later would be very welcome news.
Nevertheless, as ugly as spring 2020 was, STORE's revenue from rent still managed to increase 0.3% from a year ago, and revenue overall grew just over 2% to $168 million thanks to extra interest income on loans and financing. Adjusted funds from operations (or FFO, the equivalent of earnings for REITs) did fall 5% from a year ago, but profitability was nonetheless high enough that STORE maintained its quarterly per-share payout of $0.35 -- currently good for an annual yield of 5.5% as units of STORE remain down some 35% from all-time highs.
I expect the recovery for this commercial real estate company to be a slow-moving affair, but long term I like its prospects. One of the effects of the pandemic appears to be a migration out of the densest cities into suburbs, areas that favor STORE's single-tenant business model. And with access to plenty of liquidity to continue acquiring new properties, and debt of just $4.18 billion, I still think this is a rock-solid bet on a slowly recovering U.S. economy with a lucrative dividend payment along the way. I remain a buyer.
2. Welltower: Healthcare properties in duress
Though much more of a necessity than retail-oriented real estate, healthcare properties have also been deeply impacted during the pandemic. And a pivot toward telemedicine during shelter-in-place orders doesn't bode well for traditional in-person basic care in the coming years. But with a population expected to continue aging for the foreseeable future, senior housing and care will be in demand for a long time.
Even though senior care facilities have faced controversy in recent months, I decided to take a position in the largest senior care facility real estate owner Welltower in May. It isn't mounting the same kind of recovery as STORE, and it made a dividend cut to help shore up cash. But the REIT is still good for an annual yield of 4.3% as units of the property owner are down 32% year to date.
The story here is that move-outs are exceeding move-ins as social distancing and other ongoing worries regarding the pandemic continue. Occupancy at Welltower's properties declined to 79.4% in July, down from 85.8% right before COVID-19. By the end of the summer, management said to expect occupancy to end somewhere in the high 70% range. The rate of decline is slowing, though, tumbling just 0.7% in July versus a 2.2% decline in April. And with movement restrictions easing, Welltower is on track to offset the move-out tide.
With its payout to shareholders reduced, collected rents close to 100% again, and access to plenty of liquidity, Welltower is in decent shape. Revenue declined 10% in Q2 2020 to $1.19 billion, and adjusted FFO was down 15% to $361 million, but the dividend payout ratio stood at just 71% of adjusted FFO during the quarter. This will be another recovery story that will move in fits and starts, but the dividend is currently safe and the long-term outlook for Welltower's target industry is good. This REIT also remains on my buy list after its last business update.
