It is safe to say that real-estate investors have not had the best year.
According to Morgan Stanley analysts led by Richard Hill, the real-estate sector has declined by 11.8% since the S&P 500's pre-COVID peak on February 19, returning -5.9% compared to the 8.9% for the S&P as of October 23.
As a result, real-estate investment trusts. or REITs, which are publicly traded companies that own, operate or finance income-producing properties, have also lagged the S&P in 10 out of 16 weeks in the second half of 2020, Hill said in a research note on Sunday.
But looking at the returns of the REIT index only tells half of the story, Hill noted, adding that the market-cap-weighted returns for REITs are -2% compared to the REIT index's -14.8% this year.
"Furthermore, ~53% of the REIT market cap has realized positive returns in 2020 and ~40% has realized returns greater than 10%," he said.
He explains that the key for successful REIT investors has been stock selection as the commercial real estate market experiences a K-shaped recovery.
For example, subsectors such as data centers (+31%), industrial (+14.5%), storage (+13.6%), infrastructure (+11.4%), and single-family rental (+4.6%) have all generated positive returns this year, according to Hill.
"These sectors represent nearly 60% of the total REIT market cap of +$1.1 trillion in aggregate and three of them did not exist a decade prior (data centers, infrastructure, and single-family rentals)," he said.
REIT sector is a good place to be for the rest of the year
David Grumhaus, co-CIO and senior portfolio manager at Duff & Phelps Investment Management, agrees with Hill in that actively picking the correct subsectors to invest in is essential to generating market-beating returns.
"Sectors like data centers, cell towers, industrial logistics, and even things like single-family homes and self-storage, all those areas have done really well," he said in an interview. "Obviously, they're benefiting from everything going on with the tech revolution."
With volatility expected to surge in the months following the election, Grumhaus also believes that the REIT sector is a good place to be for the rest of the year given their steady dividend yield, relative value, and diversification benefits.
"You are seeing a 4.2% yield on US REITs and they're trading at 93% of net asset value when historically they usually trade about 100% of net asset value," he explained. "We think they offer a nice valuation and real good growth."
Better still, REITs are also insulated from the higher corporate taxes in the case of a Biden presidency.
"Their taxes are essentially passed through to the client," said Grumhaus of REITs' unique tax advantage where they are exempted from paying corporate taxes as long as they pay out 90% of its taxable income as dividends to shareholders.
"The higher corporate taxes really don't have any effect on the REITs and so we think from that perspective it's a really good sector," he said.
Given all the attractive traits of REITs in the correct subsectors, Morgan Stanley analysts have handpicked 18 REITs that have beaten the S&P this year. They are listed below in increasing order of YTD returns.
18. EastGroup Properties
Ticker: EGP
Subsector: Industrial
Market cap: $5.4 billion
YTD Total Return: 6%
17. Sovran Self Storage
Ticker: LSI
Subsector: Storage
Market cap: $5.5 billion
YTD Total Return: 12%
16. CubeSmart
Ticker: CUBE
Subsector: Storage
Market cap: $6.6 billion
YTD Total Return: 13%
15. Terreno Realty
Ticker: TRNO
Subsector: Industrial
Market cap: $4.1 billion
YTD Total Return: 13%
14. Coresite
Ticker: COR
Subsector: Data Center
Market cap: $6 billion
YTD Total Return: 13%
13. Public Storage
Ticker: PSA
Subsector: Storage
Market cap: $41.2 billion
YTD Total Return: 14%
12. Crown Castle International
Ticker: CCI
Subsector: Cell Tower
Market cap: $68.3 billion
YTD Total Return: 14%
11. Duke Realty
Ticker: DRE
Subsector: Industrial
Market cap: $14.4 billion
YTD Total Return: 15%
10. American Homes 4 Rent
Ticker: AMH
Subsector: Single Family Rental
Market cap: $9.5 billion
YTD Total Return: 15%
9. Taubman Centers
Ticker: TCO
Subsector: Mall
Market cap: $2.2 billion
YTD Total Return: 15%
8. ExtraSpace Storage
Ticker: EXR
Subsector: Storage
Market cap: $15.3 billion
YTD Total Return: 15%
7. CyrusOne
Ticker: CONE
Subsector: Data Center
Market cap: $8.8 billion
YTD Total Return: 17%
6. Prologis
Ticker: PLD
Subsector: Industrial
Market cap: $76.3 billion
YTD Total Return: 18%
5. QTS RealtyTrust
Ticker: QTS
Subsector: Data Center
Market cap: $4.1 billion
YTD Total Return: 25%
4. SBA Communications Corporation
Ticker: SBAC
Subsector: Tower
Market cap: $33.8 billion
YTD Total Return: 26%
3. Uniti Group
Ticker: UNIT
Subsector: Tower
Market cap: $2.4 billion
YTD Total Return: 29%
2. Digital RealtyTrust
Ticker: DLR
Subsector: Data Center
Market cap: $42.3 billion
YTD Total Return: 31%
1. Equinix
Ticker: EQIX
Subsector: Data Center
Market cap: $68.8 billion
YTD Total Return: 35%