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These 3 REITs Are Down 10% in 2020: Time to Buy?


Jul 16, 2020 by Matthew DiLallo

Real estate investment trust (REIT) stock prices have been under pressure this year due to the impact the COVID-19 outbreak has had on rent collection rates. Through the end of June, the average equity REIT lost about 20% of its value, according to data from Nareit. While many were down a lot more than that, some didn't sell off quite as much.

Three REITs that have fallen by a more moderate rate of about 10% this year are PotlatchDeltic (NASDAQ: PCH), Agree Realty (NYSE: ADC), and Medical Properties Trust (NYSE: MPW). Here's a look at whether their first-half sell-offs make these REITs a buy or if they could experience more turbulence ahead.

Timber for the dividend?

Timberland REIT PotlatchDeltic has lost about 10% of its value this year. The main factor weighing on shares is the impact COVID-19 has had on the housing sector, which has affected demand and pricing for wood products. That led most timber REITs to idle some of their wood products manufacturing capacity, including PotlatchDeltic, which temporarily halted production at an industrial plywood plant earlier this year. Because of the sector's issues, there were some concerns that PotlatchDeltic might join industry leader Weyerhaeuser (NYSE: WY) by also suspending its dividend to preserve liquidity.

Instead, PotlatchDeltic has opted to maintain its 4.1%-yielding payout, due in part to its strong balance sheet. CEO Mike Covey stated on the first-quarter conference call that the company has "no concerns regarding our ability to fund the dividend."

However, Covey did note that the sell-off in its stock price might impact its capital allocation decisions. He said, "Share repurchases may be a more attractive way to return cash to shareholders when our stock trades at a deep discount to fair value."

Because of that, the REIT might still cut its dividend to ramp up its share repurchase program. That payout uncertainty makes it a less appealing buy despite the lower share price, because most REIT investors desire durable dividend income.

Bucking the trend in the retail REIT sector

Retail-focused REIT Agree Realty has shed about 10% of its value this year, pushing its dividend yield to 3.8%. The primary factor weighing on the REIT is the impact COVID-19 has had on its tenants' ability to pay their rent, though rental collection rates were 88% in May and June and 91% in April, which is much better than most of its retail-focused peers. It has enjoyed higher rental receipts because it focuses on owning net lease properties secured primarily by investment-grade-rated tenants.

Because of that, Agree Realty bucked the retail REIT sector's trend of declining dividends by increasing its payout by 2.6% in May. It backs that payout with a conservative dividend payout ratio of 72% and a rock-solid investment-grade balance sheet. Thanks to a recent equity offering, the REIT's leverage ratio is less than 1.0 times net debt to EBITDA, one of the lowest in the sector.

That financial strength gives it lots of flexibility to make acquisitions. Add it all up, and this REIT looks like one of the more compelling buys in the retail sector these days, especially now that its shares are even cheaper.

Healthy income and upside for a lower price

Shares of healthcare REIT Medical Properties Trust have declined by about 15% this year, which has helped push its dividend yield to 6.1%. That slump comes even though the hospital-focused REIT has weathered the COVID-19 outbreak very well. Overall, it has collected 96% of the rent owed by its tenants in April, May, and June. That should enable the REIT to achieve its funds from operations (FFO) forecast, implying a conservative 65% dividend payout ratio.

Meanwhile, the REIT could benefit from the pandemic because more hospital operators are considering selling their real estate to free up that capital to reinvest in their system. Medical Properties has the financial flexibility to make these deals thanks to its strong balance sheet, which included $500 million in cash and $1.3 billion of available credit at the end of the first quarter.

Add the dividend income and its acquisition-driven upside potential to the lower share price, and this REIT looks like a great buy.

This year's REIT sell-off is providing investors with some great opportunities

Many REITs sold off by more than 10% through the first half of this year because of the downturn in the real estate market, including PotlatchDeltic, Agree Realty, and Medical Properties. While concerns about PotlatchDeltic's dividend mute its appeal, the double-digit declines in Agree and Medical Properties make them look like attractive buys since their dividend yields are now even higher. Given that those payouts are on solid ground, and both REITs could take advantage of the downturn to make acquisitions, they look like compelling buys following their first-half declines.

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Matthew DiLallo owns shares of Medical Properties Trust and Weyerhaeuser. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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