eResearch | Real Estate Investment Trusts (“REITs”) stock prices are falling as uncertainty rises for the ability of REITs to maintain rental income as vacancies increase during these turbulent times. The Covid-19 virus has affected real estate income streams significantly in non-essential businesses such as hospitality and entertainment.
REIT Industry
Popularity in REITs increased during recent years due to interest rates dropping to near zero globally, with investors reallocating capital towards higher yielding dividend investments. Ironically, interest rates are currently floating around zero due to the Covid-19 virus, but concerns are increasing for REITs, which were traditionally viewed as defensive investments during low interest rate environments.
As the Covid-19 lockdown continues for the near future, REITs are starting to show cash flow problems as income streams decrease and expenses pile up, all the while still being subject to paying out 90% of their taxable income as dividends to shareholders. REITs, such as ones focused on commercial malls, are often operated through gross lease models, and unless an agreement is made with the leaser, lease obligations must still be paid even if malls are closed.
The FTSE Nareit U.S. Real Estate Index, a comprehensive index series that tracks the performance of the U.S. commercial real estate market, reported that in Q1/2020, REITs have fallen more than 25% in market value, with segments such as “regional malls” dropping as much as 60%. This is a significant step back from the industry’s impressive 28% growth last year.
Various REITs’ stock prices have fallen to levels experienced during the 2008-09 financial crisis, including Macerich Co. (NYSE: MAC) and Simon Property Group (NYSE: SPG), who are both focused on real estate with non-essential businesses
Macerich
Macerich is a REIT focused on shopping centres in the U.S. with 47 regional shopping centres that generate US$355 million in cash flows from operations, but its stock price has plummeted by 66% due to the Covid-19 virus.
As malls closed all over the U.S. last month, Macerich was forced to cut its dividend by 33% to US$0.50 per share, with the cash component of the dividend capped at 20% and the rest paid in stock.
Macerich currently has US$400 million worth of debt maturing this year, which is all secured by its properties as mortgages. In the worst-case scenario, Macerich may default on its loans and lose its properties, though without recourse to the corporation.
To mitigate liquidity risks, Macerich drew US$550 million from its credit line at the end of last month, increasing its cash balance to US$735 million; the total cash balance would be sufficient to fund Macerich’s operations until the end of the year.
Simon Property Group
Simon Property Group (NYSE: SPG) is the largest premier mall REIT in the U.S. with 204 properties generating US$3.8 billion in cash flows from operations, but its stock price has dropped more than 50% due to stores and malls closing.
As a result, Simon Property Group laid off 30% of its workforce to save on costs as the Covid-19 virus significantly reduced revenue streams from its malls. In addition, CEO David Simon announced that he would forgo his salary during the pandemic, while other upper-level management reduced salaries by up to 30%.
This event comes at a stressful time as Simon Property Group has US$2.9 billion in debt due this year, in addition to US$743 million in interest expenses, US$478 million in real estate taxes, and US$551 million in committed capital expenses. Simon Property Group only has US$670 million in cash, but it is supported by a US$6 billion revolving credit facility.
Though REITs took a massive hit in the market due to global lockdowns, they are in vastly different positions than a decade ago as large amounts of capital flowed towards REITs during the prolonged low interest rate environment. As a result, many REITs are currently in a comfortable position due to healthy balance sheets and strong support from creditors.
CHART 1: S&P REIT ETF vs. Macerich and Simon Property Group – YTD Stock Performance
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