Market analysis by our public securities expert, Geoff Shaver
May 19, 2020
Who’s Paying Rent: How the COVID-19 Pandemic Impacted REITs’ April Rent Collections
by Geoff Shaver
Director of Public Securities
Since the economic disruption caused by the pandemic has taken hold, one of the most widely anticipated metrics reported by public real estate investment trusts (or “REITs”) has been their ability to collect contractual rents from their tenants. The effects of COVID-19 were not widely rooted until mid to late March, so March collection data was of little use when evaluating the operational health of the REIT market. As a result, there was great anticipation when April rent collection data was made available to investors over the past few weeks. In some instances, the results reflected strong resilience of the underlying ability for tenants to meet contractual obligations; in others, the fallout was as expected or worse. In this article, we’ll highlight rent collection trends across sectors, along with individual REITs who have exhibited significant strength or weakness.
Strong Rent Collection for Data Centers, Cell Towers, and Industrial
Some of the more resilient sectors within the REIT segment were data centers, cell towers and industrial. This is not overly surprising, given the significant uptick in demand of data consumption from increased usage of both broadband and cellular networks, along with significant increases in online retail sales. According to OpenVault, since the week of March 2nd overall broadband activity has increased 49 percent during business hours (1). While data center REITs such as Digital Realty Trust (DLR), QTS Realty Trust (QTS) and CyrusOne (CONE) have not reported April collections, collections are expected to be at or near 100%(2). This expectation is largely based on the sector’s outperformance of the broader FTSE NAREIT Index by 36% year-to-date and the relative strength of the underlying tenancy, including high concentrations from companies like Amazon, Facebook, Salesforce, and Microsoft.
Similarly, cell tower REITs such as Crown Castle International (CCI) and others have not reported out April collections, but collection rates here are expected to mirror the near 100% collections experienced at data centers. This is due to major tenants like AT&T and Verizon, as well as increased demand of the underlying product during the pandemic, and the critical need for uninterrupted cellular service.
Online retail sales, led by dramatic increases in orders from Amazon, Walmart and Instacart, realized a 49% increase in April as well(3). This accelerated growth, which was expected to be on pace for 12% annual global growth pre-COVID, will translate into a need for rapid expansion of industrial supply chains, benefitting industrial REITs with dominant exposure to distribution centers. Among the industrial REITs that have reported April collections, Duke Realty Corp (DRE) reported 96% of rents were collected, EastGroup Properties (EGP) collected 94% and First Industrial Realty (FR) reported 93%.
Given the more global footprint of Prologis Inc. (PLD), international collections have placed some additional strain on their operations; however, they have reported that 85% of rent was collected for April (as of April 20th), which was within 1% of their normal pace of collections. On average, 24% of tenants are requesting 69 days of rent relief, PLD chief investment officer Gene Reilly told analysts on their first quarter earnings conference call. Of the deferral requests that were granted — which totaled $18 million — customers received on average 33 days of deferral. The deferrals were structured to be repaid over the remainder of the year(4).
Surprising Results from the Gaming/Casino and Office Sectors
Perhaps some of the more surprising April rent collection results came from the gaming/casino sector despite a near complete shut down of Las Vegas, Atlantic City, and continued softness as casinos reopen in Macau. Despite the S&P 500 casinos and gaming index’s lagging performance, which is down 44% this year, quadruple the 11% drop in the S&P 500, both MGM Growth Properties (MGP) and VICI Properties (VICI) reported a 100% collection of April rents(5). Gaming & Leisure Properties (GLPI) reported 98.6% April collections; however, upon further review, this was inflated due to an acquisition of a property from Penn National Gaming (PENN) that included an exchange equal to five months of pre-paid rent(6). Given that these gaming facilities are mission critical to the casino operators, not paying contractual rent due to landlords so far has not been an issue.
There has been much discussion on the current and future demand for office space during the pandemic, due to the increased virtualization of the economy and the ability for many businesses to remain productive while significant majorities, and, in some cases, all employees are forced to work from home. Perhaps an additional surprise was the relative strength of the office sector’s April collections. The primarily Sunbelt-focused Cousins Property Trust (CUZ) posted a strong April rent collection of 95%. While the headline number was quite strong, the reporting of the collections of CUZ’s retail, flex office, and medical office holdings tells an interesting story.
While CUZ’s portfolio is predominately comprised of Class A office towers, their retail portfolio realized collections of only 33% for April, while their flex office (smaller, generally single-story office that may have industrial features) portfolio achieved only 75%. Their medical office portfolio exhibited stronger performance at 90%, while their predominantly Class A office portfolio recorded 96% collections for April(7). Similarly, Boston Properties (BXP) reported 90% for their combined retail and office portfolio, but when isolating just their office assets, which is also predominately Class A office, their April collection numbers increased to 95%(8).
A Tough Month for Brick & Mortar and Experiential REITs
While industrial REITs are benefiting from the increase in ecommerce activity, it comes at the detriment of brick and mortar retail. EPR Properties (EPR), whose portfolio is comprised of mostly experiential retail including movie theaters and Top Golf, has been one of the most severely impacted names in the sector and reported collecting only 15% of contractual rents in April(9). Even as regional economies begin reopening, the pace of demand for patrons to return to experiential retail is unclear. Essential Properties Realty Trust (EPRT), which focuses on free-standing retail predominantly leased by a single tenant (mostly restaurants and automotive services), reported 53% for April collections (10).
The large mall operators, which includes names such as Macerich, Washington Prime and Brookfield Retail, have fared worse, releasing percentages of rent collections for April and May averaging about 23%. One of the dominant players in the space, Simon Property Group (SPG), which opened 77 regional malls over the past few weeks, expects May collections to be about 40%.
Going forward, we expect the sectors that have shown resilience in the early innings of the economic disruption to continue to remain strong. Data centers, cell towers, industrial and self-storage will continue to remain critical demand functions in the economy. When government stimulus subsides, multifamily REITs will need to be reevaluated, despite collection data averaging around 94% for April and May. Gaming collections could begin to see disruption as casino-driven markets like Las Vegas and Atlantic City struggle due to the lack of desire for tourists to gather in large venues. Experiential retail and mall operators will likely see an increase in store closures, placing continued pressure on already weak performance.
With such uncertainty surrounding future sector fundamentals, choosing the right active manager to invest with has never been more important. We are constantly evaluating a myriad of operational metrics and relative performance indicators, inclusive of rental collection data, to determine optimal allocations in our REIT blocks. Download the Path app to determine which REIT block might be the best fit for your portfolio.
(1) - http://openvault.com/covid-19-broadband-impact-tracker/
(2) - https://www.reit.com/data-research/reit-indexes/daily-returns-us-global
(3) - https://techcrunch.com/2020/05/12/us-e-commerce-sales-jump-49-in-april-led-by-online-grocery/
(4) - Company Reports
(5) - Bloomberg
(6) - Company Reports
(7) - Company Reports
(8) - Company Reports
(9) - Company Reports
(10) - Company Reports
Director of Public Securities
Geoff leads the construction and monitoring of the public real estate securities portfolios available in our Path by Origin app. Prior to Origin, Geoff spent the last 12+ years researching and investing in public REIT securities at both Duff & Phelps Investment Management Co. and J.P Morgan Asset Management.
Geoff Shaver and clients of Path by Origin, LLC own DLR, QTS, CONE, CCI, DRE, and BXP.
Path by Origin, LLC (“Path”) is an SEC registered investment adviser. Mr. Shaver is the Director of Public Securities of Path. The views expressed herein are subject to change, and no forecasts can be guaranteed. The comments provided are for educational purposes only and may not be relied upon as recommendations, investment advice or an indication of trading intent. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of information available from public sources. The stocks mentioned in this article have been highlighted based on some reported news, quality or characteristic and do not necessarily represent all of the securities recommended for a particular portfolio. Path is not soliciting any action based on this communication. Investments involve risk, including the possible loss of principal and fluctuation of value. Past performance is not indicative of future results. Mr. Shaver and Path disclaim responsibility for updating any information herein. In addition, Mr. Shaver and Path disclaim responsibility for any third-party content.