A little more than 14 months after publicly-traded REITs—like every other part of the global economy—took a big hit as the full weight of the pandemic sunk in, the sector’s share prices have now fully recovered and are slightly above pre-pandemic levels.
REITs crossed over that threshold in April, when the FTSE Nareit All Equity REIT index rose 8.12 percent. REITs are now up 17.11 percent year-to-date and are just more than 2.0 percent above where they were pre-pandemic.
In addition, the REIT merger and acquisition market roared back to life. In mid-April, Jericho, N.Y.-based Kimco Realty Corp. and Houston-based Weingarten Realty announced a plan to merge the companies. Two weeks later, Realty Income Corp. announced it would buy VEREIT Inc. for about $11 billion. Then this week, Equity Commonwealth agreed to purchase Monmouth Real Estate Investment Corp. for roughly $3.4 billion.
WMRE sat down with Nareit Executive Vice President and Economist John Worth to discuss April’s returns, the M&A market and other developments in the REIT space.
This transcript has been edited for length, style and clarity.
WMRE: Let’s start with performance. What were the highlights for the month?
John Worth: REITs are now in positive territory vs. where they were on Feb. 21, 2020, which is our “marker” for the beginning of the COVID period. So, they have now experienced a full recovery in terms of share prices.
It’s an important guidepost for REITs to pass. And, in fact, if you look at the full 14 months from Feb. 21, 2020 to April 23, 2021, you see that REITs are up over that 14-month period by 2.1 percent.
Every previous time we’ve talked, they’ve been red for the COVID period.
At the property type level, on a year-to-date basis, shopping centers and regional malls really stand out. They are up 41.09 percent and 42.74 percent, respectively. They’ve had tremendous growth. It’s a continuation of this post-November 2020 vaccine-induced surge in a number of these property sectors that were weighed down by social distancing.
Self-storage is also up 24.8 percent year-to-date. That’s a very strong performance coming on the heels of performing well in 2020. And then lodging/resorts REITs are up 23 percent year-to-date and approaching positive territory for the full COVID period.
Another sector that’s worth noting is the apartment sector. In 2021 they are up 22 percent on a year-to-date basis, after being down over 15 percent. There were real concerns about whether we were going to see occupancies and rents drop dramatically. We did have a period where occupancies fell and rents softened. But now we are seeing occupancies and rents ticking up and we are seeing investors starting to price that into their REIT valuations.
WMRE: Can you talk a bit more about the hotel sector. The general sense we have gotten is that resort/leisure properties are leading the recovery and that there’s still some question on the pace of recovery for business travel and conventions. Is that being priced in?
John Worth: There’s a degree of hesitancy. It will be interesting when we get to late August and September. People will take a lot of confidence if these first big events that have been announced are successful. There’s still the question of whether you can get people on planes, filling the hotels, participating in conferences and having a great experience. There is a lot of optimism that it’s something that we will be able to do. But we are not quite there yet.
The other open question with respect to hotels is what share of business travel comes back. Do businesses change their business model in a way that requires less travel or do we see 2022 being a banner year for business travel as everyone gets out to see all of their clients as much as they possibly can to make up for the lost 18 months of in-person contact? There is an incredible amount of optimism for leisure and one possibility is as people travel for leisure, that will create confidence in their ability to travel for business purposes.
WMRE: Another ongoing question mark is for offices. Previously you had noted that with the bounce backs for hotel and retail REITs that office REITs were actually down the most during the COVID period, in part because of the uncertainty on return-to-office plans. Is that still the case?
John Worth: Looking from Feb. 21, 2020, through Apr 23, 2021, it is still true that office REITs are the worst performing, down 13.4 percent overall from the pre-pandemic levels.
We are seeing a steady flow of news about companies returning or setting up guidance. A number of banks want to get their people back to work. We also know in the data that more people are going back to work. The uncertainty remains about where we end up in demand for office square footage. The estimates are all over the map. I think a lot of firms are going to experiment with a lot of different models. But over the long term, we are going to see employees in the office most of the time. That doesn’t mean that in the interim, with firms experimenting with different approaches and strategies, that we won’t see some impact.
WMRE: Switching to the other news from the month, we saw some big mergers in the space. What’s driving this uptick in deals?
John Worth: The first thing to note about these is that they are not distressed deals.
In the Realty Income deal, the sales price is higher than where VEREIT’s stock was pre-COVID. For the Kimco/Weingarten deal, the valuation is very close to Weingarten’s pre-COVID stock price. And with the latest deal, Monmouth’s stock price is already quite a bit higher than it was pre-COVID.
These are all strategic arrangements. In the case of Realty Income, it is largest net lease REIT bolstering their portfolio and moving into some different geographics. They are using their low cast of capital to grow the company strategically.
The Kimco/Weingarten merger works very well in terms of geography and it helps them create a more national company.
And Equity Commonwealth is a Sam Zell-chaired company. You’ve got one of CRE’s luminaries pointing his ship in the direction of industrial properties. Over the past several years, they’ve been shedding properties and holding a lot of cash and looking for the right opportunity. This is the opportunity they’ve chosen. The are going into logistics real estate and still have a lot of dry powder to grow that portfolio further.
All three mergers come from confidence in the business models. The're large REITs that want to get larger and doubling down in their sectors.
WMRE: Does this trio of deals portend further M&A activity coming?
John Worth: That’s always difficult to predict. But I think that it’s interesting that the question that people were asking in June of last year was, “Are we going to see M&A driven by capital swooping in to get distressed REITs?” That did not happen. REITs were well-capitalized and managed their balance sheets and cash. They did not have to sell at distressed prices, even when there was a lot of pessimism in the market. And now you are seeing M&A that is truly about a strategy. So, at the end of the day, the M&A that didn’t happen is as interesting as the M&A that is happening now.