Investing in Resilient REITs Stocks During a Recession

David Cohn
Nov 4, 2022

If you're concerned that the economy might turn for the worst, reducing your investment in volatile stocks and investing in real estate investment trusts (REITs) can be smart.

Preparing for a downturn

Many people—including seasoned commercial real estate (CRE) investors who have previously experienced economic downturns—are anxious about recession.

A recession has the potential to cause a plethora of issues.

For example, stock values can drop while unemployment levels rise.

There is also the possibility that property prices might go down, though analysts say this is unlikely to happen shortly based on current market trends.

But it looks like it's fast approaching. As a result, many experts sound the alarm about an impending recession.

Increasing interest rates, inflation concerns, and international tensions are a few factors contributing to global economic uncertainty.

The good news is that if you make suitable investments, you'll be well-equipped to weather any economic downturn. One specific investment is worth looking at in this regard: REITs.

The potential benefits of investing in REITs during a recession

A real estate investment trust (REIT) is a type of entity that owns and manages various properties. There are many different areas to invest in within this realm.

For example, retail REITs manage malls and shopping complexes while industrial REITs operate warehouses and distribution centers.

Healthcare REITs operate hospitals, urgent care clinics, nursing facilities, and the like.

One of the top reasons you should invest in REITs is that they must pay out at least 90% of their income as dividends to their shareholders.

This is why REITs typically pay more significant dividends compared to regular stocks.

Depending on your position, this alone might help you get through a recession.Why do dividends matter? Because they can put some stability in your portfolio. Stock values are already down at the moment.

But if a recession were to happen and the numbers plunged even lower, you want to have a sizable dividend income because those payments could help compensate for some of your portfolio's losses. If you can afford to, keep investing.

The best time to buy is when economic circumstances deteriorate, and stock values follow suit, allowing you to buy at a low.

And if you set up your portfolio with a steady dividend income stream, you'll have the option to reinvest that money and use it to snag some great deals.

Additionally, REITs can provide portfolio diversification, which is especially crucial during economic downturns.

Some REITs to consider

Below we list some REITs that analysts say have the potential to outperform stocks and bonds and pay high distribution yields, allowing investors to cushion their portfolios in a bear market. Necessary: This is not investment advice; do your research to assess which REITs might suit your investment profile.

American Tower Corp.

Ticker: AMT Dividend yield (TTM): 2.2%AMT is a holding company that owns and operates wireless cell tower sites.

As an industrial REIT, it manages a portfolio of properties that support wireless communication networks, including cell towers.

AMT owns and contains more than 220,000 cell tower sites worldwide throughout the United States, Central America, and South Asia.

This REIT has benefited significantly from tailwinds in recent years, owing to the 5G revolution.

As a result, AMT's year-over-year quarterly earnings and revenue growth rate of 10.3% and 23.2%, respectively--are considered very good.

AMT has a beta of 0.46, which is low by investment standards. The S&P 500 index is almost twice as volatile as AMT, with a beta of 0.82. Last year, AMT paid out an annualized distribution of $5.53 per share.

Annaly Capital Management Inc.

Ticker: NLY Dividend yield (TTM): 13.9%.NLY is a REIT that appears to be trading in value territory, with a trailing 12-month P/E ratio of just 3.6. In contrast, according to Morningstar data, Vanguard Real Estate ETF (VNQ), a market-cap-weighted index of 170 U.S.

REITs, has an average P/E ratio of 27.5.Most of NLY's book of business is focused on its agency sector, which focuses on mortgage-backed securities.

Notably, the current NLY distribution payout is 88 cents per share annually. NLY has a Zacks Rank of #2 (Buy) and an A for Value.

Boston Properties Inc.

Ticker: BXPDividend yield (TTM): 4.4%If you're looking for a more traditional REIT, BXP may be a good choice.

It primarily focuses on managing Class A office buildings in Boston, New York, San Francisco, and Washington.

Class A buildings refer to prestigious office properties with higher rents, such as new skyscrapers with high-tech elevators, HVAC, and technological systems.

These spaces are frequently leased by high-profile tenants such as I.T. companies, investment banks, and asset management firms.

Although more people are working remotely, BXP's quarterly revenue and earnings still grew by 6.7% and 42.2%, respectively, from last year.

Additionally, in the past year, BXP distributed $3.92 per share to shareholders.

New Residential Investment Corp. Ticker:

NRZDividend yield (TTM): 10%NRZ is another REIT that appears to be trading at a discount, with a trailing P/E ratio of 4.45. NRZ primarily deals in mortgage-related assets, with segments operating in origination, servicing, residential securities, properties, and loans.

Additionally, they handle consumer loans and mortgage loan receivables.

Recently, NRZ stated that it would operate as an internally managed REIT, which management approximated would produce annual cost savings between $60 million to $65 million.

To reflect these changes, the company will be rebranding as Rithm Capital and using the new ticker: RITM. The most recent annualized distribution paid by NRZ was $1 per share.

Sun Communities Inc.

Ticker: SUIDividend yield (TTM): 2.2%Unlike most REITs that focus on commercial, residential, or industrial properties, SUI operates manufactured housing communities and recreational vehicle/marina resorts instead.

Over the years, it experienced significant development thanks to its track record of solid real estate purchases and a steady pipeline that includes several new projects every year.

As a result, SUI currently has more than 283 housing communities, 192 RV parks, 130 marinas, and 41 R.V. holiday sites throughout the United States, the United Kingdom, and Canada. Quarterly revenue is growing at 23.8% year-over-year; its trailing-12-month income per share is $20.54.

Prologis Inc. Ticker:

PLDDividend yield (TTM): 2.3%PLD is a fine choice for investors wanting to participate in REITs focusing on supply chain industries.

PLD is a prominent global industrial property owner, with over 4,675 properties covering about 1 billion square feet.

Over the past ten years, e-commerce growth has caused an increase in demand for warehouses and distribution center space.

As a result, PLD, a supplier of this type of space, has experienced substantial growth.

The tailwind created by continued e-commerce growth and the resulting high demand for third-party logistics providers has allowed PLD to maintain low vacancy rates and raise tenants' rent.

The most recent payout was $2.84 per share.

Ventas Inc. Ticker:

VTRDividend yield (TTM): 3.5%VTR's properties include 1,200 senior housing and health care facilities that it leases to tenants or entrusts to third-party managers.

Like PLD, it's a good alternative for investors looking to combine the benefits of REIT ownership with exposure to a different stock market sector—healthcare, in this case.

VTR's portfolio of properties is anticipated to grow due to an aging population in the United States and increasing senior health care demands.

Although COVID-19 greatly impacted senior and assisted-living housing, VTR's occupancy had recovered to an average of 83% by the end of Q1 2022.

Additionally, its balance sheet has stabilized significantly. As a result, the company's last annual dividend per share was $1.80.

Conclusion: Be ready, but don't panic

As the Federal Reserve hints at raising interest rates multiple times this year, investors are understandably concerned about a possible recession.

Although feeling anxious during uncertain times is normal, it's not something to dwell on.

There are indications that the next recession might not be as severe as previous downturns, so well-positioned investors need not panic.

Be proactive instead. Do your own REIT research to see if it fits your investment goals. In general, stocks with defensive qualities usually do better than others when the economy slows down.

So look for REITs with solid defenses and yields that beat most other investments.

As a result, they should perform well even during a recession.

While there is no such thing as a sure investment, it's worth noting that for the past two decades, REITs have performed better than standard stocks.

As a result, you may find that owning them helps you sleep soundly at night during uncertain economic times.