Sizemore: With the US Economy in a Deep Freeze, Is There Value in the REIT Wreck?

We all know what happened last month. As the number of COVID-19 coronavirus cases exploded higher, governments at all levels reacted by shutting down the world.

Now, we can debate whether that was the right move. I have a feeling we’ll be debating this for years once the dust settles and we really get a full grasp of how badly damaged the economy is. I think a lot of unemployed workers and bankrupted small business owners will argue it was absolutely the wrong move.

We’ll see. But for now, let’s focus on the stock market.

It’s easy to look at the market swoon last month and chalk it up to emotional overreaction. The S&P 500 went from all-time highs to official bear market territory in just 21 days and was down by 35% at its lows.

But was that an overreaction? Or was it a perfectly reasonable move given that the economy was on the verge of going into deep freeze?

I’m more interested in the carnage in real estate investment trusts (REITs).

Is There Value in the REIT Wreck?

REITs are normally a quiet corner of the market. Because they tend to pay high dividends, they’re a favorite of income-starved retirees.

Well, I’m not speaking in hyperbole when I say they got their heads bashed in last month. The Vanguard Real Estate Index ETF (NYSEARCA: VNQ), a popular way to track the sector as a whole, was down 44% at the lows. That’s bad, but individual stories get so much worse.

Consider Realty Income (NYSE: O). This is as close to a bond as you can get in the stock market. The REIT owns a collection of high-traffic retail properties – things like pharmacies and convenience stores. There is nothing interesting or sexy about Realty Income or its properties, and that’s exactly the point. Its investors love the stock precisely because it’s boring and gives them no drama.

Realty Income — boring, stodgy, fuddy-duddy Realty Income — was down 55% at one point and is still down close to 50%.

This is a stock that has raised its dividend for the past 90 consecutive quarters — 23 years and counting — and sailed through the 2008 meltdown. And its shares were down by more than half.

Or consider Ventas (NYSE: VTR). Ventas has long been considered one of the most conservative and best-run REITs in the business. A little over half of its revenues come from senior living facilities. Not nursing homes, mind you, but active senior centers. I call them frat houses for older people.

Well, Ventas saw its share price drop by about 80% from its February highs. It’s still down over 60%.

And then there’s one of my long-time favorites, EPR Properties (NYSE: EPR). EPR owns entertainment properties such as movie theaters, ski resorts and Top Golf facilities.

Now, virtually every property EPR owns across America is closed at the moment and will be for weeks. Maybe even a month or two. But the shares were down 82% at the lows. Does that seem like a little bit of an overreaction to you?

I’m not necessarily recommending you run out and buy any of these. I like them, but believe me, there’s plenty more out there just as cheap. The wreckage in REITs covers a good chunk of the entire sector.

I don’t know that the cruise lines survive this bear market. And the same goes for the airlines. The airlines will still exist once this is over, but they may well be working through chapter 11 bankruptcy in the process.

I could make similar statements about a host of other businesses. But I don’t expect widespread bankruptcies or long-term impairment across the REIT sector. Sure, some of the smaller, weaker players could fail, and I’d probably stay away from mall REITs given that malls were already in bad shape even before this crisis struck. I also believe a lot of these companies could end up having to cut their dividends, at least temporarily, if their tenants are unable to pay for a few months.

But the key here is temporarily. High-quality real estate that was in demand before the coronavirus blow-up will still be in demand a year from now.

If you’ve been waiting for your chance to snap up real estate at 2008-caliber prices, this is it. I don’t expect this volatility to disappear in a day, but if you’re willing to stomach it, you can buy a basket of solid REITs at prices we may never see again in our lifetimes.

• Money & Markets contributor Charles Sizemore specializes in income and retirement topics, and is a frequent guest on CNBC, Bloomberg and Fox Business.

Follow Charles on Twitter @CharlesSizemore