The COVID-19 outbreak has rattled investors in recent weeks. That has caused them to sell off stocks, including shares of many real estate investment trusts (REITs). Overall, the Dow Jones U.S. Real Estate Index has fallen nearly 9% from its peak earlier this year, with the stock prices of many REITs tumbling even further.
Some REITs, however, will largely be immune to a virus-driven downdraft in the economy, according to an analysis by BofA Securities (NYSE: BAC). Here's a look at the REIT sectors that should continue to do well even if the economy starts feeling a bit under the weather.
Virus-resistant REIT sectors
BofA analysts identified the following five REIT sectors as those that are either immune to a recession or stand to benefit from the COVID-19 outbreak:
- Data centers: Data centers securely store information for companies. They're largely immune to an economic downturn, with BofA noting that "There's no evidence of correlation between GDP growth and data center leasing activity." Further, it pointed out that a worsening outbreak could even "drive greater use of internet shopping and over-the-top video," making data centers even more vital.
- Grocery-anchored retail centers: While a recession would hurt many retailers, "grocery visits will remain essential," according to BofA. Because of that, customer traffic at retail centers anchored by a grocery store should stay relatively normal, which would also benefit other tenants in the center that provide needed services.
- Certain healthcare real estate: Medical office buildings, hospitals, and life sciences could all benefit from the COVID-19 outbreak due to a rise in patient visits.
- Self-storage: Self-storage centers have historically been recession-resistant because of stable demand for storage space.
- Wireless infrastructure: Communications towers generate steady rental revenue backed by long-term leases, making them relatively resistant to a recession. Further, BofA noted that mobile data demand usage is growing by 30% to 40% per year, and it isn't likely to slow even if the economy weakens.
Three resistant REITs for your watchlist
While REITs in those sectors should be relatively immune if the COVID-19 outbreak drives the economy into a recession, that doesn't mean their stock prices won't continue to decline if the stock market sell-off intensifies. That's why investors should consider putting REITs in those sectors on their watchlists -- so they'll have a handy buy list if market conditions deteriorate. Three to put near the top are:
- Crown Castle (NYSE: CCI).
- Digital Realty (NYSE: DLR).
- Medical Properties Trust (NYSE: MPW).
Crown Castle is one of the largest infrastructure REITs in the world. It currently owns 40,000 communications towers and another 70,000 small cells, which are important for the rollout of 5G technology. It has long-term leases in place with customers, which provide it with the cash flow to support its dividend that now yields about 3% after the recent stock market sell-off. Crown Castle expects to grow that payout by 7% to 8% per year as it benefits from the expected rapid growth in mobile data, which likely won't slow even if there is a major recession.
Digital Realty is one of the top data center REITs. It currently operates 267 data centers leased to more than 2,000 customers. It has expanded rapidly over the years due to the growth in cloud-based software solutions. That trend should continue, powered in part by a second wave of cloud-based applications such as those for artificial intelligence, autonomous vehicles, the internet of things, and virtual/augmented reality. Because of that, the company should experience minimal disruption from a potential recession, enabling it to continue growing its 3.4%-yielding dividend at a fast pace in the coming years.
Medical Properties Trust is a healthcare REIT focused on owning hospitals. The company spent a record $4.5 billion on acquiring hospital real estate last year, which grew its portfolio to 389 properties. It has a healthy pipeline of acquisition opportunities that totaled more than $3 billion to start the year. Those new additions should allow Medical Properties to continue growing its 4.7%-yielding dividend.
Lower prices = higher yields
When the value of a REIT's stock declines, its dividend yield rises. That's why income-focused investors should keep an eye out for further weakness in the REIT market. If there's another major market sell-off, they could be able to buy recession-resistant REITs like Crown Castle, Digital Realty, and Medical Properties Trust at even lower prices, thus locking in higher yields.