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These REITs Could Suffer if the Coronavirus Outbreak Worsens

[Updated: Sep 10, 2020] Mar 11, 2020 by Matthew DiLallo
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The COVID-19 outbreak is rapidly changing human behavior. Social distancing is becoming the norm as more people stay home to help slow the spread of the global pandemic. That's having a notable impact on several sectors of the economy, with the travel industry among the hardest hit.

The outbreak is also affecting companies that own real estate tied to shopping, social interaction, and, of course, travel. Real estate investment trusts (REITs) focused on retail and hospitality, for example, are getting crushed due to concerns about how the outbreak will impact the operations of their customers. Those sell-offs could intensify if the outbreak worsens -- especially for real estate tied to social interaction like entertainment and gaming -- since it could have a lasting impact on human behavior and financial results.

Turning away from the turnstiles

One REIT that's already feeling the effects of the COVID-19 outbreak is EPR Properties (NYSE: EPR), a specialty REIT focused on owning entertainment, recreation, and education properties. Its shares have tumbled more than 40% from their peak earlier this year. That sell-off has pushed its yield above 10%.

Weighing on EPR Properties' stock are concerns that the outbreak will have a financial impact on the company. Those fears aren't unfounded. As more people practice social distancing, it's affecting the number of visitors passing through the turnstiles of movie theaters and recreational attractions. The lost ticket sales and other revenue won't directly impact EPR Properties' bottom line since it doesn't operate these properties but collects rent from those that do.

However, the lost revenue from fewer visitors will affect its tenants. If conditions worsen and people continue distancing themselves from entertainment venues, then some tenants might not be able to pay their rent. That would cut into EPR Properties' income stream. If that starts happening, shares of this entertainment-focused REIT could fall even further.

Not gambling with their health

Casino stocks have also tumbled due to the outbreak as people distance themselves from these venues. That's putting pressure on the REITs that own these properties. Gaming and Leisure Properties (NYSE: GLPI), MGM Growth Properties (NYSE: MGP), and VICI Properties (NYSE: VICI) are all down more than 20% from their highs earlier in the year, pushing their dividend yields upward.

On the one hand, fewer visitors to the casinos and hotels owned by these companies won't directly impact their bottom line since they sign triple net leases with the operators of those properties.

However, if travel restrictions and social distancing continue keeping visitors away, it could begin to affect their tenants' ability to pay rent. That would put even more pressure on the stock prices of these REITs since it would impact their earnings and potentially their ability to pay dividends.

It could pay to be patient with these REITs

Anytime there is a major sell-off in the market, it can be tempting to go bargain hunting immediately. With shares of these REITs tumbling, they might seem like enticing buys since their dividend yields have risen sharply as their stock prices have fallen.

However, shares of these REITs could continue declining since there's always the risk that the outbreak could have a direct and lasting impact on their financial situations. Because of that, investors might want to wait things out before they go bargain hunting for outbreak-impacted REITs. At worst, you'll only miss out on buying at the bottom instead of right before another sickening downdraft.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends EPR Properties. The Motley Fool recommends Gaming and Leisure Properties. The Motley Fool has a disclosure policy.