If you plan to play the REITs game next year, here’s what you need to know.
“Bad News for REIT Investors” … “Negative Ratings Bias Rises as North American REITs Confront Effects of Covid-19” … “From Bad to Worse for REITs” … It’s not hard to find articles that talk about how unattractive the REITs sector is right now. However, some of the biggest winners during the covid-19 pandemic have been tied to the REIT sector.
The conventional wisdom is, as another REIT veteran back in the day once said: “Pay attention to what the talking heads are saying on TV and do the opposite – since that is what they are doing.” With that in mind, there are a few sectors that have performed well this year and on which TV’s talking heads are not focusing so much.
Industrial REITs
Having spent most of 2020 working from home, quite a bit of our time (as we must surely all admit) has gone on browsing the internet and shopping from sites such as Amazon and Walmart. Few people know that Amazon and Walmart alone lease millions of square feet from industrial REITs, such as Prologis, Inc. (PLD) and Duke Realty (DRE).
With so many online transactions occurring, the industrial REITs have gained significant tailwinds virtually overnight. A great way to play the industrial sector is through the Pacer Benchmark Industrial REIT ETF (INDS), which owns 14 of the largest industrial REITs on Wall Street. As some retailers have moved away from bricks-and-mortar stores towards website sales, industrial REITs will benefit from the demand generated by the pandemic through online shopping trends.
Net lease REITs
This sector fits right into the comment earlier about doing the opposite of what is being said on TV. If you think about the amount of traffic that petrol stations, coffee chains, and fast food restaurants have witnessed, then you know that net lease REITs are clear winners. When other sectors have experienced trouble in collecting rents from their tenants, many of the net lease REITs have received 100% of rent due from their tenants. In addition, several of these REITs have consistently raised their dividends during the pandemic.
One way to play the net lease REITs is through NETLease Corporate Real Estate ETF (NETL). This is operated by a shop called Fundamental Income, started by two folks who worked at one of the largest net lease REITs, which happens to count Warren Buffett and Berkshire Hathaway as one of its largest shareholders. If it has Warren’s seal of approval, shouldn’t it have yours?
When other sectors have experienced trouble in collecting rents from their tenants, many of the net lease REITs have received 100% of rent due
Shopping centre REITs
Essentially one of the biggest winners during the pandemic. There are approximately 17 shopping centre REITs that will be able to weather the covid-19 storm due to the increase in at-home dining. A good way to play this sector is through Alps REIT Dividend Dogs ETF (RDOG). This particular exchange-traded fund owns the five highest dividend-paying stocks across nine different REIT sectors, giving an investor exposure to some of the higher-yielding mall, shopping centre and net lease REITs that focus on the retail landscape.
Data centre and tower REITs
Like the industrial REITs, the data centre and tower REITs have had a great 2020 with so many people working from home and using Zoom, Microsoft Teams, Skype and the like to keep connected to their teams. The largest REIT by market cap is American Tower (AMT), which has experienced huge growth over the past couple of years as 5G has started taking over the world. The former CEO of American Tower, Jim Taiclet Jr, stated a couple of years ago that more than 24 hours of video is posted to YouTube every minute. That’s an incredible amount of content – and it will only continue to rise.
Pacer Benchmark has the Data & Infrastructure Real Estate ETF (SRVR), which owns 13 REITs that it says “invest in the data centres, cellphone towers, and communications infrastructure REITs and C-corps that are set to capitalise on the buildout of 5G, online commerce, artificial intelligence, virtual reality, augmented reality, blockchain, and internet of things”.
Single-family rental REITs
This sector has been a true rock star during the pandemic, as many folks have decided to move out of their apartments in the city and relocate to the suburbs. Is this due to space constraints and the need for more room? Is it because if you can live anywhere, why would you choose a high-rental district? Or is this simply the moment when millennials are looking to move out of their parents’ homes? There are many reasons, probably including all of the above, but from the single-family rental REIT perspective, this year has boasted some of the biggest winners. These include Invitation Homes (INVH) and American Homes 4 Rent (AMH), which have both posted great results with significant growth prospects on the horizon.
This is just a moment in time, and anything can change – indeed it usually does. But hopefully this article has opened readers’ eyes to nuances within the REIT sector and provided some helpful insight. A popular saying goes: believe none of what you hear and only half of what you see – a maxim that can be well applied in REIT investing in particular. Stay safe out there, and happy investing!
