Winners and losers of the urban exodus.
As we continue to learn more about the virus, one thing has become clear -- it spreads more easily in cities than in suburbs or rural areas. Densely-packed neighborhoods, crowded mass transit systems and other risk factors have caused the infection rates of U.S. cities to soar. Meanwhile, the suburbs seem to be safer in comparison, with Americans moving out of cities and into the burbs at higher rates. An inability to utilize the various social attractions a city offers combined with record-high rents has given urban residents a great excuse to look toward other options, and the widespread acceptance of remote work means that the office buildings concentrated in cities may be empty for the foreseeable future. But what does this mean for the companies caught in the middle of this mass migration?
CBRE Group (ticker: CBRE)
The unprecedented need to work from home has accelerated the remote work movement to the point that some companies may never send their employees back to the office. So how has that affected CBRE, the largest commercial real estate company in the world? Not much at all. Last quarter, the company announced a 15% increase in revenue and only a 5% decrease in adjusted earnings per share. Customers clearly value CBRE's services, with a 90% contract renewal rate, and the company's diversified business segments meant that weaknesses in its real estate investments were offset elsewhere. There are inherently high fixed costs for offices, and there will be even more costs as offices deal with providing a safe space for employees. But CBRE's position as a leader in its field provides the company and its customers with some much-needed stability.
Boston Properties (BXP)
Boston Properties' massive portfolio includes office buildings located in large metropolitan areas, such as New York City, Washington, D.C. and San Francisco. Usually, the diversification of the company's property portfolio is one of Boston Properties' greatest strengths, but with offices empty, its focus on some of the most expensive urban areas in the country may end up backfiring in the short term. In the long term, investors should keep an eye on Boston Properties' debt. BXP holds a relatively high debt/EBITDA ratio, indicating that the company may take a while to pay down its debt load. That said, with $3.3 billion in total liquidity, Boston Properties is far from going broke, which means that while the near future may be difficult for the company and its investors, in the long term, Boston Properties will weather the storm.
Empire State Realty Trust (ESRT)
The pandemic has hit New York City particularly hard, having once been the epicenter of the U.S outbreak. That leaves Empire State Realty Trust, which owns the Empire State Building, among more than a dozen other commercial properties in the city, in a difficult position. This is clear from the fact that the company only collected 73% of its April office rents, one of the lowest rates in the office REIT sector. That said, a debt/EBITDA ratio of about 4.4 isn't bad at all, and the company's dividend yield of 6.28% seems sustainable. But Empire State's fortunes are predicated on a return to normalcy in New York City, and if that doesn't pan out, then investors are in for a bad time.
Vornado Realty Trust (VNO)
Vornado Realty Trust is another New York City-centric REIT that has had a difficult time recently. The REIT's property portfolio makes it one of the largest commercial landlords in the Big Apple, and right now, that's a problem. In April, the company was able to collect 90% of the rent from office tenants, but it collected a mere 53% of the rent from its huge number of retail tenants. That spells trouble for Vornado, as illustrated by the company's funds from operations (FFO); last quarter, the company posted $0.68 per diluted share, down from $1.30 per diluted share in the same quarter last year. That gives the company an FFO payout ratio of roughly 90% -- high enough that investors should keep an eye on it and the company's dividend payout.
Spring is traditionally a time for homebuying to surge in America. This spring, fewer than usual homes were listed on the market as homebuilders obeyed lockdown orders and foreclosures were put on hold. This slower housing market may explain why shares of Zillow tumbled from a 52-week high on Feb. 21 (after the company reported a great fiscal year in 2019) to a 52-week low on March 18. But shares have climbed steadily since then as the market heats back up with demand outpacing housing supply, and Zillow is right in the thick of it. The company's focus on streamlining the homebuying process with virtual home tours, remote closings and more means it won't miss a step as lockdowns around the country continue to keep homebuyers at home.
Redfin isn't about to let Zillow steal the spotlight. With the housing market experiencing a surge, there's room for everyone at the table. Much like Zillow, Redfin's stock plummeted this spring as homebuyers kept their wallets closed. But with more people looking to buy houses in the suburbs, Redfin's shares have soared along with demand. The company had an excellent first quarter, with a 73% year-over-year increase in revenue and a net loss of $0.64 per share compared with a loss of $0.74 per share in the same quarter last year. In the earnings announcement, Redfin CEO Glenn Kelman noted that "real estate commerce has probably virtualized itself more in the past two months than it had in the prior 20 years." A company like Redfin is well-positioned to take advantage of what may be long-lasting changes in the homebuying market.
Equity Residential (EQR)
Equity Residential focuses its large property portfolio on urban and high-density suburban areas, renting and leasing apartments that are geared toward high-earning professionals. Because of that focus, Equity Residential can charge more for its properties. In fact, the company has some of the highest average rents among multifamily REITs. While those high prices may encourage renters to look toward the suburbs to get more bang for their buck, Equity Residential's "financially resilient resident base" has continued to pay rent even as the job market has suffered. That would explain how Equity Residential was able to collect 97% of its residential rents in April, which more than offset the 58% of retail space rent collected. Equity Residential's focus on high-cost urban areas may backfire if cities empty out, but its inherent stability of renters provides this REIT and its shareholders some stability for now.
Real estate stocks to watch with urban flight:
-- CBRE Group (CBRE)
-- Boston Properties (BXP)
-- Empire State Realty Trust (ESRT)
-- Vornado Realty Trust (VNO)
-- Redfin (RDFN)
-- Equity Residential (EQR)
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