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REITs And Rent Payments: What To Expect


  • A lot of REITs are missing rent payments right now due to the economic shutdown.
  • We assess the damage across the different property sectors.
  • There's one main conclusion: Rents are delayed but not lost.
  • Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Get started today »

The coronavirus pandemic is set to cause one of the sharpest retractions in economic activity ever recorded. Goldman Sachs and Morgan Stanley economists predict a 30% drop in the second quarter GDP and unemployment could soar past 25%. Many of you have been asking me:

"How will this unprecedented crisis affect rent payments?"

It's a difficult question to answer because (1) we have never been in this situation before, and (2) it greatly depends on one property type to another.

With that said, I have spent the past weeks calling REIT executives and other contacts I have in the private equity field to gain as much information as possible.

Before we dive into the various property sectors, there seems to be one main takeaway:

The missed rent payments are deferred into the future and remain owed to the landlord. They are not cancelled or forgiven. Therefore, most of the missed payments are expected to be collected by the end of the year 2020 or 2021 at the latest.

If correct, this is great news for REITs as many have been speculating that this unprecedented crisis could lead to rent dismissal due to certain clauses in leases. Based on the current information that we have, this does not appear to be the case.

Residential REITs:

Residential real estate is quite defensive because everybody needs a roof over their head and tenants don't want to ruin their credit by missing rent payments. In a regular recession, rents may go down a bit, but overall, the cash flow remains defensive.

According to the National Multifamily Housing Council, only 70% of tenants paid any of their rent in April's first week. This compares to 82% for April's week one year ago.

So there's a clear impact, but it's not very significant at this point. We suspect

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This article was written by

Jussi Askola profile picture

Jussi Askola is a former private equity real estate investor with experience working for a +$250 million investment firm in Dallas, Texas; and performing property acquisition in Germany. Today, he is the author of "High Yield Landlord” - the #1 ranked real estate service on Seeking Alpha. Join us for a 2-week free trial and get access to all my highest conviction investment ideas. Click here to learn more! 

Jussi is also the President of Leonberg Capital - a value-oriented investment boutique specializing in mispriced real estate securities often trading at high discounts to NAV and excessive yields. In addition to having passed all CFA exams, Jussi holds a BSc in Real Estate Finance from University Nürtingen-Geislingen (Germany) and a BSc in Property Management from University of South Wales (UK). He has authored award-winning academic papers on REIT investing, been featured on numerous financial media outlets, has over 50,000 followers on SeekingAlpha, and built relationships with many top REIT executives.

DISCLAIMER: Jussi Askola is not a Registered Investment Advisor or Financial Planner. The information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions. High Yield Landlord is managed by Leonberg Capital.

Analyst’s Disclosure: I am/we are long MPW; SRC; STOR; MAC; SPG; UMH; IRT; EPR;. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (63)

There are a few things that make me feel like it's still a bit early to get into eREITs.

While of course it's impossible to time the market, historically every single bear market has a false rally before capitulation, and based on the huge disconnect between the market and the real world brick and mortar economy it seems like we're in the midst of such a false rally right now.

My other concerns are a bit more specific to the sector, especially the mall reits. I was just reading about the JC Penny bankruptcy plus Neiman Marcus, J. Crew, and True Religion. They're the first, but unlikely to be the last considering the massive unemployment numbers, drop in industrial output, etc.. In addition, it seems like there is starting to be a move away from fixed rents. In a May 5th article in the WSJ, "Fixed Rent Payments Could Be the Latest Pandemic Victim," it mentions that:
"A number of retailers are already asking landlords to waive some of their rent in return for a share of future revenues. Ross Stores Inc. said last month that it would pay a rent equivalent to 2% of sales when its stores reopen. Guesst, a New York-based technology company, recently launched software to help retailers and landlords manage revenue-sharing arrangements."
It seem like it might be worth waiting a bit to see how all this shakes out.

Another short term concern is housing REITs. According to an article in the WSJ on May 1st, "Fannie Mae Income Drops as More Homeowners Suspend Mortgage Payments":

"More than 1 million borrowers are already missing payments, representing about 7% of the single-family loans it guarantees, Fannie said Friday. That figure is expected to double to 15% in the coming months as people lose jobs and incomes as a result of coronavirus-related lockdowns."

While that's not directly relevant to eREITs, it shows a general trend and while people do have to have someplace to live, it seems like there could be a significant wave of people unable to pay for multiple months who will eventually have to be evicted. Obviously they'll find someplace else to live, but their original landlords will end up with a write off more than likely.

While I'm definitely interested in getting into eREITs in the near future, I just want to play devil's advocate and try and think what can go wrong also.
Jussi Askola profile picture
Trying to time the market is not a game that you can win.

Most REITs are down 30-60% and are incredibly cheap. In fact, these are the lowest valuations in 10 years. Whether this is the bottom or not is irrelevant and impossible to know. Long term driven investors will do great at these prices and therefore, we are buying today: seekingalpha.com/...
In industrial REITs, I think you mean prologis? Considering the photo of FedEx and their clietele having FedEx as a top tenant.
Jussi Askola profile picture
@Swarandeep Wrong guess :) We are buying a more discounted smaller industrial REIT: seekingalpha.com/...
Do you think PLD is competent enough to maintain it's leadership even in the future? Any other thoughts about the same company/sector?
😅 still a nice article!
What’s you opinion on Mobile Home Park reits, I just read the New stimulus plan... “as many as 12 months of rent relief”. This could kill landlords. I’m worried and I only have 3 doors.....
Jussi Askola profile picture
I am bullish on them. Rent collection has remained strong. There is one of them in particular that we like at High Yield Landlord: seekingalpha.com/...
Though I bought additional shares in three REITs during the race to the "so far" bottom, the selling seemed excessive due to uncertainty and fear. I felt neither. I am keeping the rest of my dry powder for next earnings season. Any future purchases will need more clarity before I commit to additional purchases. Right now I am long WPC, MPW and VER.
Jussi Askola profile picture
Well said. Thank you @Cantfixstupid
A lot of negativity, but results remain strong outside of retail and hotels. We are buying heavily at High Yield Landlord: seekingalpha.com/...
Thanks a lot for your article 👍
Herman Tai profile picture
Which office reit does HYL hold today?
Jussi Askola profile picture
@Herman Tai We do not own any pure-play office REIT, but we are currently reviewing many potential opportunities that we will share soon: seekingalpha.com/...

BPY owns some office as part of its portfolio.
22thoroughbred profile picture
You’re continuing a miss-conception that I’ve heard for 6-8 weeks, the idea: “However, they are not immune either. The operators of these properties are under severe financial stress due to delays in more lucrative surgeries as they must make space for coronavirus patients.”
Is not accurate, yes many elective type procedures are being moved back to June/July the reimbursement rate for COVID cases is huge, that’s 1 reason so many deaths have been “ COVID related” those 2 words increases reimbursements by $19,000 per case, AND hospitals are being paid for every COVID case they treat unlike “normal” times when they must treat indigent patients and get ZERO for the efforts. The pandemic is taking a huge toll on people but the fees received offsets all of that and the elective surgeries will be back soon.
Jussi Askola profile picture
Thank you for sharing your thoughts, but it is not so simple, and a lot of hospitals are suffering great pain from the delays in elective surgeries. Some are filling for bankruptcy and many need additional help from the government.
22thoroughbred profile picture
Being the cynic I am, can you post a link to a possible hospital BK, I am actually curious...Thx
Jussi Askola profile picture
If you take 2 sec to google, you will find plenty of examples of hospitals that are struggling.
@Jussi Askola Thanks for the facts. Even partial, they are much better than no information.
Jussi Askola profile picture
Thank you for your comment @Jack'sson
Gary Kime profile picture
Next up,
1. Full price offer for TCO.
2. Dividend cut
3. Horrible earnings!
Jussi Askola profile picture
TCO is being bought out.
Gary Kime profile picture
The above means TCO gets their full price which is negative for SPG. They bought at the top. I should have indicated that all three of the above comments come out of the SPG earnings call tonight.
Jussi Askola profile picture
They did not buy at the top. They bought after a multi year decline, but still far from the bottom. 10 years from now, I think that TCO will prove to have been a bargain for SPG. 6-7% cap for class A mixed use assets with enormous densification potential is a good deal in a 0% rate world.
Gary Kime profile picture
Jussi, I think long term you may be correct on the market leaders (I.e, SPG/TCO) but I think you are way too early. I predict tonight is the beginning of the next leg down after horrible news is reported by SPG. I think they might eventually break the current low.

I do however think they survive but if people are going to invest in retail either SPG or MAC you better have an iron belly because you haven’t pucked it up yet.IMO

Good luck. I like your style but I think some of it comes with being young?
Jussi Askola profile picture
We are always long term oriented and openly admit that we have no clue how the market will behave in the short run. We don't think anyone knows.

We are buying REITs at cents on the dollar. We expect enormous long term upside from these prices, and we are fine with the near volatility: seekingalpha.com/...
Many of the comments here are one of the reasons I won't write a SA article. Clearly this guy is trying to HELP you for free. He writes realistically about sectors and people slam him? It was a good article relevant to the times. I appreciate his efforts.
Banker300 profile picture
Insightful article. What about shopping center REITs?
Jussi Askola profile picture
I forgot about those in this article. They would in between mall and net lease REITs. Rent collection is around 60%.
Buyandhold 2012 profile picture
What to expect from rent payments?

Trouble in River City.

But out of the ash heap of trouble comes opportunity if you just know where to look.
Jussi Askola profile picture
Well said. Thank you for your comment.
I see a lot of unrealistic enthusiasm about the re opening . Sure, you say most of your reits are not retail, but retail effects a huge amount of these properties in one way or another. These new openings are only resulting in more loses for most businesses, and really there is no light in the tunnel at this time. Companies losing money and paying back rent? I don’t see that!
Jussi Askola profile picture
Look, I never said that this is a done deal in a few weeks from now. There is a lot of pain ahead, no doubt about it. The point is that one to two years from now, life will be fairly similar to pre-crisis. Yet, REITs are enormously discounted right now. Real estate should be valued based on decades of cash flow, not a few quarters. If you are long term oriented, this is a generational opportunity and we are buying: seekingalpha.com/...

Have some patience. We are landlords, not traders.
Informative article. It seems REIT stock price remain very choppy and much more volitile than the whole stock market, such as PEAK and CXW. Why is it?
Interesting and highly relevant article, thank you.
What is material here is what will be the long term vacancy rate. Overall America is overbuit in almost every sector. Or if not overbuilt improperly built (Amazon does not want your one floor warehouse 30,000 sq ft with a measly 32 ft clear height.). That may not be temporary. Even residential can be overbuit if people start sharing housing again.

Clearly some businesses will never reopen. Some malls that were on the edge will be pushed over the edge.

It could takes years for this to rightsize.
Vacancy rates will rise even in the best properties.
Long term yes you could do well. But if you are looking for consistency in income short term that might be a concern.
Jussi Askola profile picture
NOI growth trends of the past many years would disagree with your belief that all sectors are overbuilt. NOI growth is positive in an undersupplied market.

The near term demand will be volatile for retail, office, industrial and other cyclical sectors. As always, the key is to invest in properties that are in high demand: seekingalpha.com/...
My take:

Commercial properties: The leases may say that the rent is due even if the business closes, however business interruption insurance for pandemics is generally not available. The businesses that go bankrupt will be authorized by the bankruptcy judge to abrogate the lease and those rent payments will not be paid.
As far as rents being paid in arrears for businesses that re-open, I would not count on it.

There will be downward pressure in rent rates in many markets, maybe most if not all especially commercial.

In residential, it is possible some people won't be able to make mortgage payments and will be forced into residential rental properties. This is a potential silver lining for REITs, albeit a horrible one for individuals and bad for communities, as well as the prices of homes; investors should be able to find bargains, however this is not all good.

In terms of self storage, this is a very weird asset. Price increases have already been deferred at Public Storage according to another posting on Seeking Alpha. In my community, I have noticed that there are deals for self storage that were not available before, and there is discounting due to current circumstances and perhaps some overbuilding. Unlike residential or commercial, if you don't pay the rent, you lose your belongings without a prolonged eviction process, so there is some floor (no pun intended) to rent payments.

However, in a sense, none of the above matters as much as to what extent has the market, the prices of REITs discounted or not discounted the above. My own view is that there is too much complacency, and I am waiting for prices of REITs to fall more. Others may feel that REIT prices have fallen too low for the circumstances. I actually have recently sold about ten percent of my REIT positions after the recent market snap back, increase.

REITs are a unique asset class, and historically have been very good investments; for tax sheltered accounts, they are particularly enviable. They are less labor intensive than many industries, and many REITS are by themselves diversified having many different tenants, often in varying sectors. However, REITs are no longer a sleepy investment and have been discovered by the public, and this past advantage may have been arbitraged away.
Jussi Askola profile picture
Thank you for sharing. I agree that retail will face the most struggles. I would only invest in high quality properties, which enjoy better bargaining power with tenants.

Concerning other property sectors, I am not too worried about rent payments. 90% of REITs are not retail-based. It is important to remember that.
metameta profile picture
I don't get the confidence in 'we won't cancel rent we defer it' ok that looks strong keeps contract intact,etc.. but it materially weakens your tenants.

If they are LLC's with no personal guarantees I feel this overconfidence could come back to bite landlords who let debt pile up on tenants balance sheets with no way to earn back forever lost revenue.

what happens in 12 months when the 20% of tenants who 'defer' just file BK instead? confidently 'defer' all you want it seems arrogant to me i think broke tenants will say forget it, file bk, and start over. bk is the ultimate stop loss in a tenant/landlord relationship.

btw i am speaking as an owner of a small drive thru restaurant property. they came out asking for 50% haircut in rent I asked for sales. they paid in full no call back. i am wiling to be flexible and match lost sales volume to mirror rent adjustments but just saying 'f*** you pay me' seems off to me.
Jussi Askola profile picture
We are talking about a few months of rents. It does not "materially change" the long term prospects of the tenants or the landlords.

I think that most people are overreacting here. I agree retail has pain ahead. But that's small fraction of REITs. Most companies we are buying enjoy near 100% rent collection: seekingalpha.com/...
Wow! You sound like a real nice guy
MEBH Investment profile picture
We are invested significantly in MAC at sub 10 levels. Expecting an “opening” bump in the coming weeks. The water is certainly murky in this environment but we feel the investment opportunity outweighs the risk.
Jussi Askola profile picture
@MEBH Investment Thank you for sharing. I have no clue about short term performance, but very bullish on the long term prospects.

Feel free to join us for a free trial to read our comparison of MAC and GGP: seekingalpha.com/...

It is very relevant to today's situation.
Other Side Of Trade profile picture
The author has left out the category of REITs most likely to encounter rent deferral requests--shopping centers, which at best are collecting 60% of rents. FRT has stated that unpaid rent will indicate to them that the tenant needs to be replaced with a stronger or more ethical business. Good policy, but short term pain. The ultimate problem with BRX, KIM and others is the probability that up to 50% of small businesses will not survive, especially if a long recession occurs. Filling those empty spots will take some time.
Jussi Askola profile picture
Outside of retail, most REITs are collecting 95-100% right now.
And when it comes to retail, I expect high quality companies such as FRT to collect most deferrals and return to normal fairly quickly.
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