What happened
Shares of real estate investment trust (REIT) Annaly Capital Management (NLY 2.37%) rose nearly 13% in November according to data from S&P Global Market Intelligence. That's not bad, but it's well shy of the nearly 30% gain at Seritage Growth Properties (SRG +0.00%). And that advance was bested by the 40% price increase seen in Kimco Realty's (KIM +0.13%) stock during the month. The proximal cause for the advances was coronavirus vaccine news, but clearly there's more going on.
So what
In November Pfizer and BioNTech, AstraZeneca, and Moderna all announced that they had achieved material success with their coronavirus vaccine development efforts. For a world that's trying to muddle through a global pandemic, this is very good news. Investors were rightly excited about these updates and bid up the prices of stocks. The S&P 500 Index, using SPDR S&P 500 ETF as a proxy, was up nearly 11% in the month. The REITs here did better than that to varying degrees, which is important information for investors to digest, because it hints at the very different situations each of these REITs is in.
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For example, Annaly is a mortgage REIT. This is a very different business than property-owning REITs like Seritage and Kimco. Conservative investors are probably better off avoiding the sector due to its complexity. The key here is that mortgage REITs generally make use of leverage to boost returns, using the value of the mortgage portfolios they own as collateral for the loans they take on. Annaly's stock fell sharply in early 2020 because of concerns about liquidity and market disruptions when the coronavirus first hit, with investors worried that the value of its portfolio could fall to the point where it would have to sell assets on the cheap to repay its own loans. That didn't happen, the housing market has remained relatively strong, and the stock has steadily recovered. This is why November's gain was good, but not incredible.
Seritage, meanwhile, owns retail properties. The retail sector has been hit hard during the pandemic, as many non-essential stores have been forcibly shut and consumers are staying home to avoid crowds. However, that's only half the story here. Seritage was created by Sears Holdings, well before COVID-19 was around, as a way for that retailer to raise much needed cash. From day one Seritage's business model was to find new tenants for properties occupied by troubled Sears and Kmart stores.
It has done a good job of executing that plan, but the coronavirus has clearly made it harder for the REIT. First there's the issue of collecting rent from tenants, with collection rates increasing from 70% in the second quarter to 86% in the third. But there's a very big second issue to look at here: Seritage is still in the process of revamping its business. Nearly 39% of its portfolio falls into the "signed not occupied category." In other words, it has leases for these properties but the tenant hasn't moved in yet because the property isn't ready. The REIT has solid prospects, but it still has a lot of money to spend to upgrade assets for new tenants. At the end of the day, a lot here depends on Seritage's relationship with its lenders. All in, even though a vaccine will help a great deal, the REIT is really the same turnaround play it was before the pandemic hit.
Kimco Realty is a bit more mundane, as the REIT owns shopping centers. That said, the coronavirus hasn't been easy on the company or its shareholders. In April the landlord only collected around 60% of the rents it was owed. That improved to 76% in June and 90% in October. Its business is clearly on the mend. However, occupancy has been declining, as both large and small tenants struggle to survive in these troubling times. In fact, occupancy is likely to fall further before it starts to increase again, especially with COVID-19 cases on the rise again. The REIT trimmed its dividend nearly 65% in the third quarter, which isn't a particularly reassuring move. So even this story isn't quite as simple as "a vaccine will solve all problems."
Now what
There's no denying that an effective and widely deployed coronavirus vaccine will help all of these REITs. But investors can't paint the entire sector with a single brush. As a mortgage REIT, Annaly has very different operating dynamics than traditional property-owning REITs. While Seritage and Kimco are both in the retail space, the dynamics they are dealing with are not the same, as Seritage has the extra baggage of rebuilding its portfolio. And while Kimco is, relatively speaking, a boring retail REIT, a vaccine won't be enough to quickly turn things around. Mr. Market can swing to emotional extremes, but long-term investors need to step back and carefully analyze what's going on. These three REITs, each of which rallied strongly in November, show just how vital it is to dig deeper today.
