Real investment estate trusts (REIT) are companies that own and operate income-producing properties. There are all types including homes, apartments, office space, retail space, medical offices, data centers, etc. They typically pay higher than average dividends and their share prices are driven by interest rates and underlying fundamentals.
Retail REITs Most Affected
Although they have varying degrees of risk and leverage, they typically outperform during recessions given their diversification, place on the capital structure, and inflows when interest rates decline.
However, the coronavirus situation is unique, and the economic shutdown in the economy is likely to lead to a wave of defaults and bankruptcies which will affect the REIT stocks. The most vulnerable are REITs connected to retail and restaurants like Simon Property Group (NYSE: SPG), Macerich (NYSE: MAS), and Kimco Realty (NYSE: KIM). Many of their tenants are simply unable to make payments, and it will be hard to find new ones to take their place at least immediately.
These stocks are down by more than 50% since the market top in late-February. It's likely they will be forced to cut dividends and expenses. Going into this crisis, these stocks were already underperforming the broader market as online commerce was eating away market share from physical retailers. Labor costs were also increasing which was making stores and restaurants less profitable.
Even after the economy opens up, things will not go back to normal. Social distancing protocols means that there will be a limit on the number of customers in a store, while staffing will have to increase or at least stay the same to ensure proper hygiene and distancing measures.
Cell Tower, Data REITs Strong
One segment that has been insulated from the coronavirus outbreak is cell tower and data center REITs. Some of the well-known names in this space include Equinix (Nasdaq: EQIX), Digital Realty (NYSE: DLR), Crown Castle (NYSE: CCI), and American Tower (NYSE: AMT). All of these stocks are yielding more than the 10-year Treasuries but also have solid growth prospects.
During the market selloff in March, these stocks declined between 20% and 35%, however, it's a testament to their strong fundamentals, that they have bounced back to new highs. One secular trend has been the explosion in data which is only going to continue growing in the next decade, and these companies will benefit. More people working from home and spending more time online will only increase demand. Additionally, low-interest rates will make their dividend yields more attractive on a relative basis.
Even if the broader market makes new lows, it's very possible that stocks will make higher lows. Long-term investors should use that weakness to add or build positions in these stocks. While the retail-based REITs will have tantalizing, oversold bounces, they will likely make lower lows if the broader market moves lower.