From Seeking Alpha Reitster, Jussi Askola:SummaryREITs often get a bad reputation for the massive volatility of 2008-2009.In reality, REITs have done much better than most stocks during recessions and outperformed in late cycles.Today more than ever, REITs are well-positioned to outperform in this late cycle. Balance sheets are strong, fundamentals are healthy, and valuations are reasonable.The great financial crisis really hit the REIT market with a perfect storm. The housing market crashed, banks stopped working, and suddenly refinancing debt became much more difficult or even impossible in many cases. REITs were forced to cut dividends not necessary because of operational issues, but because they needed liquidity to deal with maturating debt and other uncertainty.Dividend cuts, combined with a housing crash and troubled banks, led to massive volatility across the REIT sector and it continues to negatively affect the sentiment of REITs to this day.With recession fears starting to spike again, we have heard a few market pundits recommend staying out of REITs altogether.We believe that this is very short-sighted. These investors still see nightmares of 2008-2009 which led to the sharpest real estate crash of mankind. In reality, this was a rather exceptional event that is unlikely to repeat itself in the future. Each recession is different, and REITs have fared way better than regular stocks during most recessions. Researchers from Cohen & Steers note that: "REITs have outperformed the S&P 500 by more than 7% annually in late-cycle periods since 1991 and have offered meaningful downside protection in recessions, underscoring the potential value of defensive, lease-based revenues and high dividend yields in an environment of heightened uncertainty."Read on:https://seekingalpha.com/article/4291542-reits-recessions-ta...Interesting read. David
Hi DavidTo consider how REITs will perform in a recession, its probably better to consider the industry they lease to rather than REITs as a homogeneous industry. From the 2007-1010, the REIT Sector's that had the fewest dividend cuts was healthcare while that with the highest dividend cuts was leisure, as I recall. I believe 80% of all equity REITs...or close to that....cut dividends.But having said that, I'd agree that liquidity probably becomes one of the foremost managerial issues in the early part of a recession, particularly when there is a credit crisis and refinancing becomes difficult and expensive as happened in the last recession. Thus the amount of debt and its maturity would become a critical factor for most REITs, as REITs unlike C-Corps, cannot retain very much cash but must distribute most of it, putting REITs in general at a higher liquidity risk.It would be interesting to do a dividend reduction analysis for all equity REIT sectors during the 2007-2010 period and compare that with the recession of 2000-2001 due primarily to over-exuberance and reliance on profits that just were not yet there.BruceM
Good comments and observations, Bruce.As I recall, many REITs paid dividends in shares instead of cash during the 2007-2010 period.David
In addition to good properties and strong managements, which are always perennial pluses, I would want long leases (probably not apts, storage, or hotels), strong tenants, and a conservative balance sheet.
I think most of my REIT's don't have any maturities for the next 2 to 3 years. I think it is more important than the liquidity number REIT's typically tout. That liquidity from revolver, etc could dry in hurry. Also, keep an eye on the capital committed to development.
Give me a strong balance sheet and I'll take any REIT sector in a recession. In particular, the short lease terms of the storage sector bother me not at all. Leases can be broken. But people are committed to their junk--er--valuable possessions.
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