Call it what you will. The Covid-19 pandemic. The Great Lockdown. The Coronavirus Recession. Whatever label you give it, it remains unprecedented. Never in history has more than 60% of the global population come under this kind of lock-and-key restrictions all at once.
The effects of the shutdowns range country to country. But in the U.S. alone, the Congressional Budget Office (CBO) expects second-quarter economic growth to come in at -40%. The New York and St. Louis Feds, meanwhile, have even worse estimates at -47% and -50%, respectively.
Now, for the July-September period, there’s supposed to be a 20%+ surge back upward, which would mark see the strongest economic growth in history. However, let’s face the facts: that this unprecedented situation has largely upended one of REIT investors’ most cherished and basic assumptions.
It will be dangerous moving forward if we don’t.
A REIT Reversal for the Record
So far, more than 180 companies have announced either dividend cuts or full-out suspensions since the start of the shutdowns. And as was expected (as soon as we gathered our wits enough to expect anything), plenty of economically sensitive REITs are among that unfortunate number.
For instance, it’s no surprise that hotel REIT dividends haven’t done well.
Even in typical recessions, they lack the long-term leases and stable cash flow of other equity industries. That’s why I look for AFFO (adjusted funds from operations) payout ratios of 75% or less in this subsector rather than the 90% that’s safe for most REITs. Essentially, you need a safety buffer for the bad times that are bound to happen, sending occupancy down.
The same 75% applies to industrial REITs, which often have economically sensitive cash flow.
We can see similar problems with low-quality mall and shopping center REITs: the kind that have high leverage, like Whitestone Realty(WSR), Macerich(MAC) and Washington Prime Group(WPG). All three have cut or suspended their dividends – something I warned income investors about even before the lockdowns.