REIT declines outpace stock market amid shutdowns nationwide

Hotel REITs suspend dividend payments as occupancy slides amid a battering week

TRD NATIONAL /
Mar.March 20, 2020 02:48 PM
(Credit: Pixabay)
(Credit: Pixabay)

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.”


Related Articles

arrow_forward_ios
Single-family and condo home sales were up sharply in L.A. County in June

“Massive release of demand”: LA County June home sales surge

“Massive release of demand”: LA County June home sales surge
Michael Rosenfeld and a rendering of Century Plaza (Credit: Presley Ann/Getty Images for THR)

Inside Michael Rosenfeld’s $1.8B odyssey at Century Plaza

Inside Michael Rosenfeld’s $1.8B odyssey at Century Plaza
An illustration of Gov. Gavin Newsom (Credit: Justin Sullivan/Getty Images)

LA County ordered to shut indoor dining for 3 weeks as Covid cases climb

LA County ordered to shut indoor dining for 3 weeks as Covid cases climb
Brookfield Asset Management CEO Bruce Flatt and Woodridge CEO Michael Rosenfeld with 101 S. Marengo Avenue, and a rendering of the building (Credit: Google Maps)

CRE investment sales in LA sank like a stone in May

CRE investment sales in LA sank like a stone in May
John Zhao and a rendering of Oceanwide Center (Credit: Rendering © DBOX; Nora Tam/South China Morning Post via Getty Images)

Coronavirus forces another delay of Oceanwide Center sale in San Fran

Coronavirus forces another delay of Oceanwide Center sale in San Fran
Gov. Gavin Newsom (Getty)

Not so fast! A week after they reopened, state orders LA County bars to close

Not so fast! A week after they reopened, state orders LA County bars to close
Douglas Elliman CEO Howard Lorber and West Coast exec Stephen Kotler

In “new world of real estate,” Elliman exits Montecito office

In “new world of real estate,” Elliman exits Montecito office
LAHSA Executive Director Heidi Marston

LA County targets $800M to house the homeless

LA County targets $800M to house the homeless
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...