2020 has not been kind to the world of real estate investment trusts (REITs). Even though the S&P 500 has largely recovered from the market dip in March, the US REIT Index is still down 14.7% for the year. With many businesses still shuttered and unemployment around 11%, some real estate trusts are noting tenants missing rent.
Three REITs that have been hit particularly hard are apartment developer Avalon Bay Communities (NYSE: AVB), healthcare and senior housing operator Healthpeak Properties (NYSE: PEAK), and student housing specialist American Campus Communities (NYSE: ACC). All of these companies have seen their stock prices decline by 20% or more so far this year.
Are the depressed stock prices an opportune time to pick up shares on the cheap and lock in some high yield dividends? Let's take a look at why their stocks have plummeted and whether they're in trouble or not.
Avalon Bay Communities
Residential real estate has long been one of the most stable sectors of the real estate industry, but in times like this the term "stable" is pretty relative. With businesses still shuttered nationwide and additional eviction restrictions in place, there are some concerns about tenants' ability to keep paying rent. As of the most recent update, Avalon Bay's management noted that rent collections in May were 95% of billed rent and that occupancy rates were down 90 basis points to 94.4%.
There's no denying the fact that tenants not being able to make rent and lower occupancy rates are going to have an impact on the bottom line. Also, delays in construction and development will slow revenue growth and be a drag on profitability the longer those assets sit on the books unable to generate revenue.
Fortunately, the company has some financial wiggle room. At the end of the most recent quarter, Avalon Bay reported that its dividend paid to investors was only 69% of funds from operations. This means that there is a decent enough cash cushion such that it can handle a financial hit over the next couple of quarters. Also, the company has a debt-to-capital ratio of 42.5% and an investment-grade credit rating.
It would be naive to think that Avalon Bay will be immune to coronavirus-related impacts. It will certainly be worth watching to see if there are any material changes to its occupancy levels and collections as a percentage of billed rent. All things considered, though, Avalon Bay looks like one of the safer bets in the world of REITs right now.
Healthpeak Properties has been hit particularly hard, in large part because of one portion of its portfolio: senior housing. As COVID-19 has spread and has had a significant impact on nursing homes, elderly folk are apprehensive to move. In its most recent investor update, management noted that move-ins at its operated properties were down 65% compared to the previous year. That was offset slightly since move-outs were also down 12% year over year, but occupancy across its senior housing portfolio had dropped to around 79%.
The good news for Healthpeak is that its senior housing segment is becoming a smaller and smaller portion of the overall portfolio, and strong rental rates at its medical office and life sciences building have been able to make up for the material weakness in senior living. According to management, occupancy rates in these two segments continued to climb over the past two months and rent deferrals have been minimal. It's also worth noting that its two facilities under construction are both 100% pre-leased and will generate stabilized revenue once complete.
Another thing working in Healthpeak's favor is that its balance sheet is in better shape than it has been in a long time. Over the past two years, it has reduced its debt to capital from 60% to 47% and its debt-to-EBITDA ratio has declined from 9 times to 5.22 times. Management also notes it has about $2.8 billion in liquidity from cash on hand and unused credit lines. This should give the company adequate wiggle room to navigate through any issues that may arise with its senior living portfolio.
Healthpeak is by no means a layup investment right now. The issues with its senior living portfolio could drag on for some time and be a drag on the overall portfolio. However, it isn't likely going to be a company-killer issue either. Investors shouldn't expect great things from its stock any time soon, but the chances of it cutting its high-yield dividend look rather low.
American Campus Communities
In any other world, American Campus Communities would look like a solid investment. Providing housing for university students seems like a slam dunk. Student housing is typically an incredibly consistent business with high occupancy rates. Also, American Campus Communities has done a good job of pricing its housing such that its new developments can be price competitive with the existing student-housing stock, making it a rather compelling value. Over the past several years, this has been a winning formula that has outgained both the Vanguard Real Estate ETF and the broader S&P 500 on a total return basis.
In this world right now, though, there's enough of a legitimate threat to the company's operations that investors may want to take a step back and reevaluate the situation posed by COVID-19.
One point of concern for the company is that its properties are disproportionately located in states that are being acutely impacted by outbreaks right now. Seven of its 10 largest campuses, in terms of percentage of overall net operating income, are located in the states of Texas, Florida, and Arizona. New coronavirus cases are increasing at rapid rates in these states, and it could seriously alter previous plans for universities to open their doors for the fall semester.
In a press release dated June 1, the company said 69% of the universities it serves were planning for in-person classes in the fall. A lot has changed since then, and a lot will likely change between now and when school is slated to start. Of the three companies here, American Campus Communities could experience the largest impact from the coronavirus, and the decisions that will impact it are largely outside its control. With this in mind, it may be best to hold off on buying this stock until we get a better picture of what schools plan to do in the coming weeks.
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