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Last year was a tough one for real estate investment trusts (REITs). Many REITs lost value due to the impact of the COVID-19 outbreak on their rental collection rates and outlooks.
However, with vaccines starting to get rolled out, the pandemic should subside in 2021. That could turn a headwind into a tailwind, giving REITs the power to soar. Three currently beaten-down ones that appear poised to skyrocket this year are EPR Properties (NYSE: EPR), Simon Property Group (NYSE: SPG), and SL Green Realty (NYSE: SLG).
Hoping for a blockbuster box office year
EPR Properties has been among the hardest hit REITs by the pandemic. The specialty REIT focuses on owning experiential properties like movie theaters, eat-and-play venues, and other attractions, many of which had to close their doors to slow the virus' spread. Because of that, many of its tenants couldn't afford to pay their rent (its rent collection rate was 24% in the second quarter and 41% in the third). The company has been working with tenants by deferring rent and restructuring its contracts, which should yield much higher future collection rates.
The biggest catalyst for EPR Properties is the full reopening of movie theaters, which currently make up 46% of its portfolio. Only 63% of those properties were open as of early November, and they weren't generating much revenue due to limited available content. However, that should change in 2021 as vaccines roll out, enabling theaters to reopen fully. On top of that, the movie industry has a huge lineup of films slated for this year because it pushed several from 2020's slate into 2021. If the box office enjoys a banner year, EPR Properties stock should soar as it recovers from last year's more than 50% plunge.
Longing for some retail therapy
Mall owner Simon Property Group muddled through a tough year in 2020. Like EPR Properties, many of the retail REIT's tenants had to close their doors to help slow the spread of COVID-19. Because of that, they couldn't generate sales, making it tough to pay their rent. As a result, Simon's FFO was down 24% year over year through the third quarter.
However, 2021 should be a much better year for the mall owner. While the pandemic accelerated the adoption of e-commerce, lockdowns have also created lots of pent-up demand for experiences like shopping. Consumers appear poised to get in some retail therapy this year, with vaccines starting to roll out and another round of stimulus checks getting sent out.
On top of that, the company recently closed its acquisition of fellow mall owner Taubman Centers at a lower price than the original pre-pandemic deal. That adds another catalyst to what could be a bounce-back year for the mall REIT's stock, which tumbled more than 40% last year.
Eagerly anticipating a return to the office
The pandemic also brought challenges to the office sector. Many companies quickly pivoted to working remotely to help slow the spread. Because of that, office occupancy levels were low for most of that year. That caused concerns that companies might allow more of their employees to permanently work from home, reducing their need for office space. That uncertainty weighed on office REITs, like SL Green Realty, as its stock tumbled 35% last year.
However, the company worked hard to navigate the pandemic. It sold high-quality office buildings at premium prices and took advantage of falling interest rates to refinance debt. That gave it the cash to repay debt, buy back shares, boost its dividend, and even pay a special dividend. Meanwhile, it successfully secured new leases for key development projects and existing properties.
With vaccines beginning to roll out, employees should be able to start returning to the office later this year. As they do, that should help alleviate concerns about the future of offices, which many companies have realized are crucial to their operations. They've found them to be essential for attracting, developing, and mentoring high-quality employees as well as for innovation and creating culture. As that happens, SL Green Realty's stock could head skyward.
These REITs have big-time bounce-back potential in 2021
Vaccines could give the REIT sector a shot in the arm this year. If they roll out quickly and begin to quell the pandemic, society can resume a more normal life. That would give people the freedom and confidence to get out again and enjoy entertainment, shopping, and return to the office, which should boost the shares of REITs beaten down by the pandemic.
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