Real estate is one of the defensive sectors. As such, some real estate investment trusts (REITs) could offer investors some protection against a recession.
Still, investors shouldn’t think in blanket terms, meaning that not all REITs are ideal for protection during contracting economies. Selectivity is needed, and for market participants who don’t have time to analyze each member of the REIT universe, active management has its benefits. Enter the Virtus Duff & Phelps Global Real Estate Securities (VGISX).
VGISX typically holds 50 to 70 REITs, and some of the fund’s member firms, as of the end of the second quarter, are drawing sell-side praise as recession buffers. Those include apartment REIT AvalonBay Communities (NYSE:AVB) and Prologis (NYSE:PLD).
“With the backdrop, we upgrade both AVB and PLD whom we believe will be able to produce (1) internal growth on the back of loss to lease and (2) external growth due to in process developments assembled well before recent rent growth occurred,” wrote Wolfe Research analyst Andrew Rosivach in a recent report to clients.
Wolfe identifying REITs with recession-fighting potential is important because the research firm believes that a recession could arrive before the end of this year followed by a jump in unemployment figures in 2023.
Obviously, a recession will be trying for any number of companies across a variety of sectors and industries. AvalonBay and industrial REIT Prologis, both of which are top 10 VGISX holdings as of the end of the second quarter, might not be 100% immune to economic contraction, but these REITs have some traits that could imply durability in rough economic environments. Those include tidy balance sheets and below-average debt ratios relative to their respective peer groups.
“We anticipate AVB external growth is particularly powerful in 2024, while PLD has an attractive self-funded business model, with additional funding coming from particularly strong promote earnings in 2022 and 2023,” added Wolfe’s Rosivach. “In short, both companies have business models to create value-and earnings-from sources beyond being only price takers for rent growth.”
While rent collecting is very much the name of the game in the real estate sector, REITs, including VGISX components, enjoy pricing power, meaning that this actively managed mutual fund could be a relevant consideration for investors seeking income and inflation protection.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
