Another barrage of bad news on the coronavirus front led to another rough week for the markets, with the Dow Jones Industrial Average erasing its past three years of growth and real estate investment trusts getting hit particularly hard.
The FTSE Nareit All REITs index was down 21.74 percent through the first four days of the week, outpacing the Dow Jones, which declined by 13.35 percent over the same period. The tally from the All REITs index was significantly worse than the prior week’s decline of 12.23 percent, according to the latest data.
On Friday, the Dow had fallen by another 800 points at close.
Hotels and malls were once again among the biggest losers.
“REITs are required to pay at least 90% of their taxable income as dividends to shareholders, so they generally do not carry large cash reserves,” wrote Chris Hudgins, an industry expert with S&P Global Market Intelligence, in a report Thursday. “With the tourism industry grinding to a standstill, it could become more difficult for REITs with higher debt levels and low cash reserves to service their debt.”
Many hotel REITs have suspended dividend payments and are drawing on credit facilities in response to the coronavirus crisis, the report noted.
“We took our dividend outlook lower for several REIT names, as REITs are facing more operational challenges as stock prices decline and yields spike up,” said James Shanahan, a senior equity research analyst at financial services firm Edward Jones. “Fundamentally, we think that the risk has increased for the real estate sector overall.”
On the retail side, the week was marked by more major shutdowns, as mall giants Simon Property Group and Taubman Centers temporarily shuttered all U.S. stores. Simon announced last month that it would be acquiring an 80-percent stake in Taubman.
Hotels and retail face more tough times ahead, as governments across the country have begun ordering people to stay home. California and Illinois issued statewide shelter-in-place orders over the past 24 hours — a similar order in New York comes close — as the number of coronavirus cases in the U.S. has surpassed 15,000.
Lenders, especially those with high exposure to the hospitality industry, are also feeling the heat. The FTSE Nareit Mortgage REITs index is down nearly 53 percent since the start of the month, a greater drop than even the mall and hotel sectors have seen over that time.
Real estate brokerages have also suffered, with Realogy Holdings’ stock price falling more than 75 percent from its price of $11.80 last year.
Real estate stocks’ recent struggles present a challenge to the traditional view of REITs as a defensive sector, and the leveraged nature of commercial real estate is playing a role in this, some observers say.
“While declining treasury rates are a positive, the spread above the risk free rate and lending conditions also matter,” Morgan Stanley analysts wrote in a Thursday research note. “In a recession, we could see a scenario where [net operating income] growth is flat to negative, financing costs don’t improve (maybe even widen) and lending conditions tighten.”
“That scenario would be a net negative for [commercial real estate] prices, especially for sectors and companies that have relied on greater leverage.”