Shares of hotel operator Park Hotels & Resorts (NYSE:PK) jumped nearly 15% in August, according to data from S&P Global Market Intelligence. Following close behind was experiential-focused landlord EPR Properties (NYSE:EPR) and its gain of nearly 13%. However, on the other side of the ledger was mall real estate investment trust (REIT) Tanger Factory Outlet Centers (NYSE:SKT), which fell roughly 12% in the month.
All three stocks have been hit hard by the economic shutdowns used to slow the spread of COVID-19. EPR Properties is actually the best performer of the group, down 54% through the first eight months of 2020. The other two were both down a little more than 60% over that span. So even after all of the ups and downs here, the big story is that 2020 has been a pretty disastrous year for these real estate investment trusts. This backdrop also helps to explain the divergent stock performance in August.
EPR owns a large collection of experiential properties, including things like movie theaters (roughly 46% of revenue) and what it calls eat and play assets (22%). The only other property type that’s material is education at 11% of the top line. The rest is a mixed bag of things like ski resorts, gaming facilities, and attractions. However, the fact that roughly two-thirds of its portfolio comes from places where people go to have fun is a key factor, since these were the types of non-essential businesses that got shut down by the government. It has been really bad, with the REIT only collecting about 28% of its July rents. Not surprisingly, it suspended its dividend.
But with businesses, now including movie theaters, starting to reopen, the future is looking much brighter for EPR. It’s too soon to tell what’s going to happen from here, since some of its largest tenants have debt-heavy balance sheets and still-struggling businesses. But it’s pretty clear that investors are betting that the worst is over and pushing the shares higher in the expectation that rent collection will improve materially as business gets back to some semblance of normal.
Park Hotels & Resorts is a similar story. Demand for hotels fell off a cliff when COVID-19 hit, causing the REIT’s properties to get shut down as people followed the government’s social distancing guidelines. When the company reported second-quarter earnings in early August, only 70% of its properties were open for business. The thing is, that was actually a vast improvement over the first quarter when two-thirds of its hotels were shuttered. So, despite dismal earnings in the quarter (which was largely expected), the outlook for the future is clearly getting brighter. Investors bid the stock up on the hopes that customers will start returning, now that Park’s hotels are open for business again.
Tanger Factory Outlet Centers’ story is strikingly different in some key ways. The REIT’s portfolio of largely outdoor malls was mostly open throughout the COVID-19 shutdown, but many of the stores in its facilities were shut. This is a key distinction that highlights the problems Tanger is facing. The retail sector was already suffering before the coronavirus pandemic, as over-leveraged retailers unable to adjust along with customers were closing stores and falling into bankruptcy. The speed of the so-called “retail apocalypse” only picked up as retailers were shut down by the government. And the shake-out in the industry is far from over, which means that Tanger is likely to see further pain in the months ahead.
Since it takes time to find new tenants to fill vacant space, COVID-19 will probably have a lingering negative effect on Tanger’s top and bottom line even as the world works its way back from the shutdowns. Investors fearing that the worst isn’t yet over here avoided Tanger’s stock in August — not an unreasonable choice.
Tanger really does face the largest challenge here as the retail sector continues to work through a very difficult period. However, investors shouldn’t underestimate the issues that EPR and Park are dealing with. Yes, the world is starting the process of normalization, but things are still far from returning to pre-COVID-19 levels. A good month or two isn’t enough to call an all-clear, and conservative investors would probably be best off taking a show-me attitude with all three of the names here for the foreseeable future.