What happened
Shares of real estate investment trust (REIT) Front Yard Residential (RESI) rose a dramatic 53% in October, according to data from S&P Global Market Intelligence. That compares to a decline of 12% at Empire State Realty Trust (ESRT -0.65%) and a drop of roughly 20% at CoreCivic (CXW -1.17%). For reference, the broader REIT sector, as measured by the Vanguard Real Estate ETF, was lower by 3%. You have to dig into the details to understand what was going on with these three REITs.
So what
Front Yard Residential, which owns single-family rental properties, has been dealing with dissident shareholders. Two large investors were complaining that the company needed to narrow the discount between its market valuation and the value of the assets it owns. The key suggestion was that Front Yard Residential should liquidate, returning cash to investors as the portfolio was slowly sold. That didn't happen.
Image source: Getty Images.
Instead, Front Yard Residential announced that it had agreed to sell the entire company for $13.50 per share in cash to Ares Management. The total valuation of the deal was $2.4 billion, including debt. On Oct. 19, the day the deal was announced, Front Yard Residential's stock took off. The agreed-upon price represented a nearly 36% premium over the previous closing price and a 45% premium over the one-month average price. It looks like investors agitating for change got what they wanted here, just not how they expected it.
CoreCivic largely owns and operates jails, and its stock has been heading lower lately. The shares have been trending lower for years. Since peaking in 2015, the stock is down more than 80%. The company has at least partly attributed some of its problems to the REIT mandate to pay out 90% of taxable earnings as dividends, since it required the company to take on debt to fund its business. That said, it stopped paying dividends in April and shortly thereafter announced that it would jettison the REIT structure.
But these moves don't appear to have assuaged investors. In fact, one of the big ongoing concerns is that CoreCivic and other for-profit peers running jails are facing increased government scrutiny. There are concerns that the business model won't hold up to changing political whims. In October, that specific fear heated up as polls showed that the Democratic candidate was leading in the Nov. 2 presidential election. Without CoreCivic's dividend and with its plans to switch back to being a regular corporation, the potential for increased political headwinds put the company's investors in a negative mood. That's not really so shocking, but it transcends the coronavirus issues facing other REITs today.
The last name here is a bit more mundane, if you consider owning the iconic Empire State Building just a regular day at the office. But Empire State Realty is the one name in this trio that is actually an example of the world that exists today. The REIT, which owns office and retail assets in and around New York City, reported earnings at the end of October. It wasn't fun reading.
Core funds from operations (FFO), which are like earnings for an industrial business, came in at $0.12 per share in the third quarter. That was half the level achieved in the same period of 2019. That helps explain why the REIT chose to suspend its dividend in late August.
Moreover, as people and businesses continue to deal with COVID-19, there doesn't appear to be an end in sight just yet. For example, third-quarter rental collections came in at 94% of what was owed (96% for office space and 84% for retail). But in October, that figure fell to 92% (93% office and 84% retail). Until businesses start to bring employees back in large numbers, which some industry watchers doubt is in the cards, investors are likely to take a dim view of Empire State Realty and its hyper-focused New York portfolio.
Now what
There was a lot going on with these three REITs, with the key takeaway being that you have to dig down into a company's story before you really know what's going on.
Front Yard's tale is largely played out at this point, since the stock is trading at roughly the buyout price being offered.
CoreCivic, meanwhile, is facing a number of material issues in the year ahead, including the complexity of ditching the REIT structure. It's probably not the best option for most investors right now.
And Empire State, while just a typical boring REIT compared with the other two, is still trying to muddle through the impacts of the coronavirus. There's no clear sign of when those headwinds will subside.
