Parts of the real estate sector can offer insulation against economic downturns, like the coronavirus-sparked recession the United States has seemingly entered. Real estate investment trusts – which buy up property, collect rent and pass most of the money along to shareholders – offer one way to tap into different areas of the market. But not all of them are created equal. REITs that own shopping centers, malls, lodging properties and senior living centers have gotten hit hard. Meanwhile infrastructure, self-storage and industrial REITs have held up relatively well, and data center REITs have actually gained ground. In the month through Friday, March 27, the S&P 500 Index (.SPX) fell more than 18% and its real estate sector lost more than 21%. But these nine REITs performed better than both over that period, indicating their possible resilience during a recession.
QTS Realty Trust
One reason data center REITs can be recession-resistant is that their services are needed regardless of how the economy is doing. "There is no evidence of correlation between gross domestic product growth and data center leasing activity," Bank of America analysts wrote recently. "Data centers are necessary for corporate and internet continuity." They also help make online shopping, downloading or streaming video via the internet and working remotely possible. QTS (QTS) has more than 7 million square feet of data center space in North America and Europe. On March 26, the company said it was seeing significantly boosted demand because of the increase in remote working. The number of new, unique logins to QTS' service delivery platform increased 30% over a three-week period. The stock, which recently yielded 3.4% annually, lost around 6% during the month through Friday.
Data center REITs gained around 5% in the month through Friday, outperforming other REIT property segments, according to data compiled by the National Association of Real Estate Investment Trusts. With a footprint including the Americas, Europe and Asia, Equinix (EQIX) claims to have the world's largest network of interconnected data centers. And the company recently confirmed that all its data centers are fully operational. "As businesses rush to scale online collaboration and network capacity, Equinix is already working with customers to enable distributed and remote workforces," the company's CEO said recently. EQIX, which recently yielded 1.7% annually, lost less than 1% during the month through Friday.
Digital Realty Trust
This data center REIT recently posted a COVID-19 page on its website, saying its facilities are all operational and are equipped with supplies so that they can remain operational if remote operation becomes necessary. "We have long prepared for the possibility of a pandemic within our overall business continuity plan to ensure we can maintain this service level," the company says. DLR (DLR), which recently yielded 3.3% annually, rose around 8% during the month through Friday.
American Tower Corp.
Like data centers, wireless and broadcast tower REITs could fare better than other types of property in a recession because demand for their services is likely to remain resilient regardless of how the economy performs. That is especially true now as many people are prevented from visiting relatives in person and may want to talk on the phone or video chat. American Tower (AMT) is one of the largest global REITs, with around 180,000 tower sites across several countries, including the U.S., Brazil, France and India. The company's shares lost around 6% during the month through Friday. They recently yielded 1.9% annually.
Bank of America analysts recently wrote that the tower segment is one of the most defensive REIT property sectors amid the spread of COVID-19. They note that the long-term lease contracts these REITs enter into with their customers lend stability that can help them weather economic downturns. Also, social distancing isn't too much of an issue at cell towers, as there is much less of a need for in-person interaction there than at office buildings or restaurants. SBAC (SBAC) shares fell around 4% during the month through Friday. The stock yields about 0.7% annually.
Data centers aren't the only REITs connected with the world of e-commerce that could benefit as people avoid brick-and-mortar shops. REITs that own industrial property where companies like FedEx (FDX) and Amazon (AMZN) collect and ship orders stand to fare better than others in a recession. In a recent posting on its website, PLD (PLD) said coronavirus-sparked growth in e-commerce, grocery and home-improvement categories could help temper the downturn for logistics real estate companies. In addition to exposure to e-commerce, REITs like these can often be insulated in recessions because of the long-term nature of the leases they sign with customers. During the month through Friday, industrial REITs as a whole fell roughly 7% and PLD lost around 9%. PLD recently yielded 2.9% annually.
Self-storage REITs lost around 8% during the month through Friday, far better than the broader equities market. Meanwhile, the apartment, manufactured and single-family home segments were down by around 20%. Presumably, as people lose their jobs, they might have to downsize their rentals or otherwise adjust their living situations. This could increase demand for off-site storage for the stuff people no longer have space for at home. PSA (PSA), which is by far the biggest self-storage REIT, lost around 9% during the month. Its annual dividend yield was recently 4%.
Extra Space Storage
With a market capitalization of more than $12 billion, EXR (EXR) is the next-biggest self-storage REIT after PSA. As of Dec. 31, the company owned and/or operated more than 1,800 self-storage properties with 1.3 million units and about 140 million square feet of rentable space. Bank of America analysts wrote that self-storage is "often considered a risk-off sector due to consistent tenant demand" and that the property segment has been resilient during prior recessions. They list EXR among the most defensive buy-rated REITS with the highest distribution yields. Recently, EXR yielded 3.8% annually. The company's shares dipped around 5% during the month through Friday.
Alexandria Real Estate Equities
Amid the wider stock market sell-off, the health care REIT segment has also gotten hit hard. But as with the real estate sector as a whole, health care may not be uniformly affected as the pandemic wears on. A recent note from research firm CFRA said, "We forecast life science, medical office and acute care hospitals will rebound faster than senior housing properties that are on lockdown to protect the health of the elderly residents." A substantial part of Alexandria's (ARE) business focuses on the life science industry, which is made up of medical science research facilities, meaning it could weather a coronavirus recession better than some other REITs. The company recently yielded 2.9% annually. It lost around 7% during the month.
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