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These 3 Real Estate Stocks are Down 20% in 2020. Time to Buy?

Jul 22, 2020 by Matthew DiLallo

The real estate sector is one of many industries hard hit by the COVID-19 outbreak and its impact on the economy. Governments forced many nonessential businesses to close their doors to help stop the spread, which had a widespread effect on the real estate industry. These issues weighed on most real estate stocks this year.

Three hard-hit real estate stocks were Vail Resorts (NYSE: MTN), Realty Income (NYSE: O), and Beazer Homes (NYSE: BZH), which have all tumbled roughly 20% so far this year. Those sell-offs likely have value-focused investors wondering if they might be a buy on an eventual market rebound. Here's a look at whether that's the case or if they might have more downside ahead.

An avalanche of bad news

Vail Resorts is a leading global mountain resort operator with 37 world-class destination resorts and regional ski areas in the U.S., Canada, and Australia. The company owns some of the best real estate in most major ski resort areas. That real estate generates lots of cash during good times.

Unfortunately, that hasn't been the case this year as COVID-19 forced the company to close its North American resorts and rental/retail stores in mid-March, causing it to miss the rest of this year's winter ski season. The company also reduced its capital spending plan, suspended its dividend for at least two quarters, and furloughed most of its employees to preserve liquidity.

Vail Resorts currently plans to resume its North American operations in time for the summer season as well as open its Australian resorts for that country's winter ski season. However, the COVID-19 outbreak could impact those plans, especially with case numbers rising across much of the U.S. Further, even if its resorts are open, visits will likely be down significantly since fewer people will want to go on vacation because of the pandemic. That could also impact its operations during the upcoming winter season. If that's the case, the stock could have further to fall.

Given that uncertainty, investors might want to wait until there's an approved COVID-19 vaccine -- which would give people the confidence to go on ski trips -- before buying this beaten-down real estate stock.

Strength amid the storm

Retail REIT Realty Income has tumbled this year because of the impact COVID-19 has had on its tenants' ability to pay their rent. The company only collected 86.9% of its contractual rent in April and 83.5% of May's rent as of its last update. While that's much higher than many other retail REITs thanks to the strength of its portfolio, the lower rental collection rate will affect the company's cash flow.

On a more positive note, Realty Income has continued to pay its dividend each month, recently notching its 601st consecutive monthly payout and 107th straight quarter with an increase. That's impressive considering that most of its peers in the retail REIT space have suspended their dividends this year. That's unlikely to happen at Realty Income since it has one of the highest credit ratings among retail REITs.

With shares down roughly 20% this year, the yield on Realty Income's monthly dividend has risen to 4.9%. Given that the payout is on solid ground, this REIT looks like an attractive buy, especially for investors seeking a good monthly dividend REIT.

From a headwind to a tailwind?

Homebuilder Beazer Homes has tumbled this year due to concerns that rising unemployment rates resulting from the COVID-19 outbreak will impact demand for new homes. That would likely put pressure on sales volumes and pricing, with that one-two punch doing a number on homebuilding margins.

However, market conditions don't appear to be as bad as some fear. In mid-June, fellow home builder Lennar (NYSE: LEN) reported that it had resumed housing starts and land spend to match improving market conditions. One of the drivers was that customers were moving out of apartments and from densely populated areas into new homes in more suburban locations because stay-at-home orders issued to slow the spread of COVID-19 highlighted their need for more space. With inventory tight and mortgage rates low, demand for new homes could strengthen in the coming quarters as more people seek out more spacious living accommodations.

That market rebound would likely benefit Beazer Homes, which should boost its stock price. However, that potential upside alone doesn't necessarily make the stock a buy since it's not as attractive as some other top homebuilding stocks.

Only one of these beaten-down real estate stocks stands out

While the COVID-19 outbreak has sent shares of Vail Resorts, Realty Income, and Beazer Homes down 20% this year, their sell-offs don't automatically make them buys. That's because the recent surge in cases across much of the U.S. could impact the rebound prospects of Vail Resorts and Beazer Homes, which could put more weight on their stocks.

On the other hand, Realty Income has weathered this storm better than most thanks to the strength of its real estate portfolio and balance sheet. Add that to its higher-yielding dividend, and it's a more attractive buy now that its stock has sold off.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Vail Resorts. The Motley Fool has a disclosure policy.

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