The real estate investment trust (REIT) sector was hit harder than most by the COVID-19 crisis. These stocks fell as stay-at-home orders hurt mall operators, financial market volatility gave some mortgage investors a near-death experience, and remote work caused investors to question the longer-term viability of the office business model.
Here are three REITs that were hit particularly hard by the coronavirus pandemic.
The epicenter of retailer pain
Macerich (MAC 0.06%) finished 2019 trading at $26.92. By April 2, it had fallen to $5.02. What happened? Macerich develops regional shopping centers (that is, malls) and community/power centers, which are smaller and usually anchored by supermarkets. As a REIT, it develops these shopping centers and then rents them out. As shopping centers were closed to combat COVID-19, companies like Macerich were hit particularly hard. Most of Macerich's properties were either partially or fully closed, as many of its tenants sold discretionary goods like apparel or operated restaurants. These were precisely the "non-essential" businesses that were temporarily shut.
Many retailers were simply unable to come up with the rent and either defaulted or went into a forbearance, where the missed rent will get paid back in January 2021, when the retailers are flush with cash. Restaurants didn't have that ability. As the COVID-19 shutdowns were eased over the summer, Macerich recovered some of its pre-COVID stock price, but it was still down about 60% this year at Friday's prices. Income investors have been particularly hurt by this stock -- Macerich cut its dividend from $0.75 to $0.15.
The bonfire of the mortgage backed securities
Invesco Mortgage Trust (IVR -1.25%) entered 2020 trading at $16.65. It fell to $1.95 a mere three months later. What happened? Invesco Mortgage Trust is a mortgage REIT, which is a different business model than Macerich's. Instead of buying real estate and lending it out to tenants, mortgage REITs buy real estate debt (i.e., mortgages) and collect interest instead of rent. The early days of the COVID-19 crisis were characterized by extreme volatility in the financial markets. Invesco Mortgage borrowed against its mortgage assets, pledging them as collateral. As the value of these assets fell, Invesco's lenders demanded additional cash as collateral. The company didn't have that much cash on the balance sheet, so Invesco tried to sell some of its assets. Unfortunately, the markets were so illiquid, the company couldn't find buyers.
Eventually, Invesco entered into a forbearance agreement with its creditor banks. This gave the company the breathing room to sell off assets at non-fire sale prices. Invesco ended up changing its business model, and today is a completely different company, focusing on government-guaranteed mortgages. During the dark days of the crisis, Invesco was a favorite of the day-trading Robinhood crowd. Today, the stock has partially recovered and is out of forbearance, but is a shadow of its former self. It is down about 80% year to date as of Friday morning. Invesco cut its dividend from $0.50 to $0.02 before increasing it to $0.05.
Escape From New York
SL Green Realty (SLG -1.56%) is an office REIT with a concentration in New York City. On the last day of 2019, it closed at $91.88. About three months later, the stock was trading at $38.64. What happened here? The COVID-19 crisis demonstrated that remote work is possible for most knowledge industries. Why pay expensive rent in Manhattan? The concern isn't misplaced. We have seen recent stories about huge banks like JPMorgan Chase and Goldman Sachs considering moving some of their operations to cheaper areas. So far these fears haven't materialized, as third-quarter collections from office tenants came in at 97%. Retail was much lower, however, with SL Green only collecting 70% of billed rent. The retailers are being squeezed by a lack of tourism spending as well. SL Green is down about 35% year to date, although it has managed to finish the year without being forced to cut its dividend.
So are any of these stocks ripe for a rebound? With COVID-19 cases going in the wrong direction, it is hard to get excited about office REITs or mall REITs. Invesco Mortgage Trust is an interesting story, with the crisis behind it. Invesco yields 6.2% and trades at about a 7% discount to book value. That said, mortgage REITs like Annaly Capital Management and AGNC Investment Corp. have similar business models and better yields, and they survived the COVID-19 crisis without entering into forbearance with their banks.