Why some REITs have defensive qualities

Neil Nabar thinks some REITs offer downside protection.

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"Amid the stock market's downturn and uncertainty related to the coronavirus outbreak, I added exposure to certain real estate investment trusts, or REITs," says Neil Nabar, portfolio manager of Fidelity® Select Construction and Housing Portfolio (FSHOX).

Nabar believes REITs can be somewhat defensive because they offer dividend yields that are often higher than those on US Treasurys or investment-grade corporate bonds. Plus, they have assets—typically property and buildings—underlying their value.

In managing the fund, Nabar focuses on REITs he views as higher-quality franchises with below-average debt, good management teams who value balance-sheet strength, and valuations that underestimate his projection of earnings power. He also looks for REITs operating in markets that are seeing demand outpace supply.

As of March 31, the fund's largest REIT holding was Essex Property Trust (ESS), a residential REIT that focuses on multi-family housing in California, a desirable place to live but a hard place to build despite a massive undersupply of housing, according to Nabar. He notes that Essex is well-positioned, with its focus on mid-range apartments. Among specialized REITs held in the fund at the end of March was Digital Realty Trust (DLR), a data center owner and operator that recently merged with European rival Interxion. In addition to the ongoing enterprise shift to cloud computing, Nabar expects additional demand for cloud storage as the coronavirus pandemic forces more people to continue working from home.

Nabar also held a notable stake in American Homes 4 Rent (AMH), which specializes in rentals of single-family homes.

Fidelity® Select Construction and Housing Portfolio held securities mentioned in this article on March 31, 2020. As of this date, Essex Property Trust composed 8.45% of fund assets; Digital Realty Trust composed 2.05% of fund assets and American Homes 4 Rent composed 2.40% of fund assets.

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Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry.

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