UPDATED, Friday, Feb. 28, 2020, 6:15 p.m.: As coronavirus fears shook markets and led to the steepest stock drop in over a decade this week, usually safe real estate investment trusts tumbled.
“We’ve seen massive drawdowns across the entire equity market, and massive panic and sell-offs,” said Alexi Panagiotakopoulos, co-founder of Fundamental Income, sponsor of the NETLease Corporate Real Estate ETF.
The stock market’s three major indices over the past five days saw their worst performances since the Great Recession. As of market close Friday, the S&P was down about 11.5 percent for the week, according to S&P Global Market Intelligence.
Meanwhile, the SNL U.S. REIT Equity index had fallen about 12.3 percent for the week, according to S&P. On Friday alone, the index fell about 2.5 percent.
The sell-off started Monday and accelerated to include publicly traded REITs, which typically are viewed as defensive investments in the wake of periods of short volatility. Those REITs tend to pay higher-than-average dividends and have a relatively durable source of cash flow — even if tenants were to take financial hits from people staying home because of the virus.
“It’s not like the corporations can stop paying their rent,” Panagiotakopoulos said.
Meanwhile, other real estate firms also struggled Friday: Reology, which reported earnings earlier this week, closed down 4.43 percent. ReMax saw its stock price dip 0.85 percent.
At the start of the week, REITs posted losses — but not as sharp as the rest of the market. In the days that followed, though, their losses overtook the broader market.
The drops come after a strong year for REITs, which posted nearly 29 percent total returns in 2019. That was just below the S&P 500’s nearly 32 percent total return, according to S&P Global Market Intelligence.
Fed Reserve response
This week, the U.S. saw its first case of community transmission of the virus — or contagion of unknown origin — which was reported in California. The news, along with signs of growing outbreaks in countries far from where it started in mainland China, triggered business and recreational travel to slow.
On Friday, the Federal Reserve issued a statement about the impact of the virus, which has infected over 80,000 people in 35 countries and has led to 2,800 deaths, according to reports.
In the statement, Federal Reserve Chairman Jerome Powell said the fundamentals of the U.S. economy are strong, “but the coronavirus poses evolving risks to economic activity.” The statement followed comments by other central bankers who signaled that more interest rate cuts may be needed to stave off the economic impacts of the epidemic, according to the New York Times.
“Falling interest rates should provide some support as well for the market,” said Todd Kellenberger, REIT client portfolio manager at Principal Global Investors. “But right now it feels as though anything that’s an equity is being sold.”
Meanwhile, the losses in the REIT world this week in response to the virus are “uncharacteristic,” Panagiotakopoulos said. They are based on market perception, he said. “The perception of bankruptcies, the perception of corporate credit risk. But not everything is 100-percent correlated.”
Also, he noted, not all REITs are created equal.
“In times like this, everything draws down, and it creates mispricing,” Panagiotakopoulos said.
Hits to hotels
Hotels have been hit particularly hard, as they are highly sensitive to market volatility because they charge by the night and because the virus has hampered travel. Hotel REITs’ prices fell 18.4 percent this week, per S&P.
Arne Sorenson, CEO of Marriott International, tried to calm analysts and investors in an earnings call Thursday, saying the impact of the coronavirus was temporary.
“This will pass,” he said. “And when it does, the impact to our business will quickly fade.”
But the short-term impact is staggering. The company reported that this month its revenue per available room at its hotels in China plunged almost 90 percent from the year before.
Meanwhile, the best-performing sector in the REIT space has been self-storage, a sector that posted losses of 7.5 percent for the week, according to S&P.
That’s because it’s still earnings season, and self-storage — now facing headwinds of oversupply in the sector — had largely done better than expected in the fourth quarter, said Todd Kellenberger, REIT client portfolio manager at Principal Global Investors.
Another real estate segment that could get slammed is the already ailing mall sector.
Shopping centers rank third among the public places that people said they are avoiding — after international travel and public transportation — amid the coronavirus outbreak, according to a survey released Friday by retail research firm Coresight Research. Nearly a third of respondents said they already are staying clear of public places, whether that’s shopping centers or even their workplaces.
In an earnings call this month, David Simon, CEO of mall owner Simon Property Group, noted the company’s revenues could be hurt in the short-term from a drop in tourism related to the outbreak.
“And assuming we get through this coronavirus scenario, we expect our overage to continue to be dominant or at growth in our outlet business,” he said.
Still, if the sell-off in the REIT space continues at the same level as other equities, it could present an opportunity for investors, Kellenberger said.
“The impact to fundamentals and earnings is going to be less in that of REITs than it would be for most other areas of equity markets,” he said.
Write to Mary Diduch at [email protected]