REIT Update From CIBC Private Wealth’s Equity Income Team

Gordon Scott, CFA
July 14, 2020

Real estate investment trusts (REITs) are a diversified group, spanning many different categories. We share some factors used in identifying opportunity.

Real estate investment trusts (REITs) have been in the press a lot lately as they lagged the market during the sell-off in March. This was surprising to many, as real estate is often viewed as a more defensive sector of the market. Given the recent underperformance, a few clients are wary of REITs and recently asked for our views on the real estate market today.Our view is more nuanced.

The REIT market is not a homogenous sector. Rather, REITs are a diversified group, spanning many different categories, including office space, industrial warehouses, storage facilities, data centers, cell towers, apartment buildings, student housing, casinos, shopping malls, healthcare facilities, hotels and more. While some REITs have declined substantially and are indeed facing significant headwinds—such as those operating in the office and retail segments—there are also some notable pockets of strength.

Office REITs have struggled as more employees are working from home or have been sidelined due to the COVID-19 stay-at-home orders. This has most companies starting to rethink how much office space their firms will require going forward, with a view toward reducing their real estate footprint. Likewise, retail REITs have also sustained significant losses in the wake of the pandemic, exhibiting continued vulnerability to online retail giant Amazon, e-commerce gains, and a retail landscape in the United States that has significantly more stores per capita than other Western economies.

That said, we are seeing opportunities in some REIT sub-sectors that behave more like tech stocks, such as cell tower and data center operators, which are doing well despite the current economic conditions. Typically, we look for REITs that have secular tailwinds to their businesses and growing cash flows and dividends. Some of the investment themes supporting our REIT holdings include the growth in mobile data usage, adoption of 5G cellular capabilities, growth in cloud computing, the continued migration of workers and residents from East Coast and Rust Belt states to Sun Belt states, and rising demand for grocery home delivery services.

 

Gordon Scott, CFA, is an equities portfolio manager for CIBC Private Wealth Management’s Equity Income and Large Cap Growth strategies, with more than 25 years of industry experience.