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The coronavirus continues to generate more volatility after yet another wild week for U.S. equity markets. Stocks ended in the green following historic intra-day fluctuations and an emergency rate cut by the Federal Reserve (by 50bp to 1 percent-1.25 percent).
The economic fears regarding the coronavirus and its impacts have put the Fed in a very difficult situation and it remains uncertain as to whether the last move will boost confidence.
Domestic-focused and yield-sensitive equity sectors were the big winners this week, as U.S. REITs surged 4.2 percent, with 14 of the 18 real estate property sectors finishing higher by at least 2.0 percent.
Lost in the volatility, employment data was strong across the board this week, headlined by Friday’s nonfarm payrolls report which surged past expectations with 273k net gains, beating estimates of 175k.
As the editor of the Forbes Real Estate Investor it’s easy for me to recommend REITs, an income-oriented business model designed for retirees, but I feel as though I need to become a more vocal cheerleader in these uncertain times.
According to Hoya Capital Real Estate, “there were far fewer signs of investor “panic” this week” yet the market seemed to lose focus after “fourth-quarter earnings season for the REIT sector was generally better than expected, with roughly 45% of REITs beating prior guidance (above the 35% average beat-rate) while a solid 35% of REITs raised full-year guidance.
The trends that dominated 2019 continued in the fourth quarter with the residential, industrial, and technology REIT sectors continuing to record strong growth while the retail and lodging sector continues to struggle, trends that appear poised to be further amplified by the near-term impacts of the CV-19 outbreak.”
The top-performing REIT property sectors of 2019 have continued their strong relative performance through the early stages of 2020 as cell towers, manufactured housing and data center REITs top the charts so far this year, while storage REITs have also performed well this year.
The coronavirus-inspired pullback has created a window of opportunity for income-oriented REIT investors to take advantage of the highly predictable dividend income that REITs generate (REITs must payout at least 90 percent of their taxable income in the form of dividends).
Several of our strongest conviction buys include Simon Property Group (SPG), Tanger Outlets (SKT), Ventas Inc. (VTR), CoreCivic (CXW), Iron Mountain (IRM), Ladder Capital (LADR), and Omega Healthcare Investors (OHI).
Recognizing that the advantage to owning high-quality REITs is that investors can take advantage of the “power of compounding” while also benefitting from the upside of solid share price appreciation. REITs have generated highly consistent total return performance over many decades.
While the coronavirus has sparked a panic within the financial sector, this black swan event has less significance to real estate since the asset class provides core necessity “shelter” attributes. Ultimately the short-term panic will subside, and the underlying real estate should continue to grow in value.
This makes REITs especially appealing, because you are not only betting on the real estate that the company owns, but also on the management team and its ability to grow earnings and dividends.
With the latest pullback, investors should become more familiar with REITs and their purposeful ability to generate solid returns through various cycles, including “black swan” events like the coronavirus.
I own shares in SPG, SKT, VTR, CXW, IRM, LADR, and OHI.