Victor Kuznetsov, Managing Director of Imperial Fund, examines how US real estate investment trusts are weathering the COVID-19 storm.
Real estate investment trusts (REITs) have always been, historically, a classic of dividend investment through the Buy & Hold formula, which has allowed both retail, institutional and investment fund investors to have periodic cash flows, which complement their pensions in some cases, and that they increase their profit accounts in others.
In general, the REITs were distributing a dividend that usually ranges from the most “modest” of Realty Income (O) of 1.5-2% per year to that of other mortgage REITs such as Annaly or Agnc, whose dividends they reach 8-9% per year.
Nevertheless, the health crisis is practically causing an economic emergency, in which almost all the REITs are seeing their prices decrease, anticipating the fall of the real estate market and the entry into the technical recession.
At Imperial Fund one of the fundamental aspects in this investment sector, which seeks to achieve attractive risk-adjusted returns by exploiting inefficiencies in the residential and commercial real estate lending market, is diversification, which makes it possible to reduce both the beta (risk) of our portfolio, without jeopardizing the return on investment.
General and Sectoral Real Estate REITs
In these historical moments in which the coronavirus crisis is hitting strongly all investment portfolios, including those of institutional investors even though they use hedging instruments, the losses due to the drop in the price of the listing are being high, in view of the prospect of business downturn and recession across the United States.
Observing the different sectoral types of REITs, and among the most penalized, and which have more possibilities to continue distributing a dividend without decreasing it and recovering in presumably a shorter period, we can distinguish:
Realty Income (O): It is the classic of investment in the field of REITs, it is considered an aristocrat of the dividend, and it distributes a monthly dividend, which in turn allows increasing the utility of compound interest. Its price has decreased from $84.92 to approximately $54, although we should not forget that in the 2008 crisis, its price dropped to $17.
Annaly Capital Management (NLY): It is the mortgage with the largest capitalization in the United States. Its price per share has decreased from $10.50 to $6.70. It is clearly being harmed by the global alarm situation, but that it is another diversified company that allows to systematically cover the risk.
Omega Healthcare Investors (OHI): It is another of the classic and most important REITs in the residential sector for the elderly. Its price has fallen from $45.22 to $17.50. The only explanation from the point of view of the fundamental analysis is that the market is picking up the loss of potential clients in their residence, because it is one of the most punished REITs, although obviously and in the worst case the replacement rate, in both the United States and England is clearly guaranteed.
The current situation should not provoke investors to believe that we are not able to think about the future, a future that, as has happened with previous crises, will always bring something positive, and will reward investors who trust in those companies that have adequate diversification, distribute a sustainable dividend, and are able to adapt to any situation that may arise.
At the present time, we may have entered a general downward curve on the stock market, and the aforementioned share price of REITs will drop further still, but they should be on the investment radar as a possibility in the future not far away.
Imperial Fund is a mortgage investment fund formed in 2014 and headquartered in Hollywood, FL. Imperial seeks to achieve attractive risk-adjusted returns by exploiting inefficiencies in the residential and commercial real estate lending market.