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REITs Well Positioned For a Grand Reopening


KEY TAKEAWAYS

  • Vaccination progress and fiscal relief stand to directly benefit sectors impacted by the pandemic
  • REITs (real estate investment trusts) appear attractively valued relative to stocks entering what has historically been a favorable early-cycle environment
  • We see opportunities in cyclical/value plays, e-commerce infrastructure and work-from-home beneficiaries

Vaccines, policy and consumer trends are uniting to create opportunities across the real estate landscape, setting up 2021 as a potentially strong “vintage year” for REITs.

Looking to a vaccine-driven recovery
Just as the pandemic upended certain types of real estate in 2020, we believe progress in vaccine distribution and fiscal stimulus are creating the potential for a Grand Reopening that could directly benefit some of the most impacted REIT sectors.

The U.S. is vaccinating around 2 million people per day, and more Americans have now had their second vaccine dose than have been diagnosed with COVID-19 since the start of the pandemic, prompting officials to begin lifting restrictions.(1) Extraordinary fiscal relief measures are adding to economic recovery expectations, including nearly

$2 trillion in new U.S. COVID relief on top of $3 trillion approved in 2020. With other developed economies also ramping up vaccine distributions, we believe 2021 could offer attractive entry points for allocating to real estate.

REITs are coming off historical lows versus stocks
At February 28, 2021. Source: UBS Investment Research, Cohen & Steers calculation.

Earnings multiple spread is the difference in the average ratio of per-share REIT price to funds from operations (FFO) and stock price to earnings. 2021 multiples based on current-year earnings estimates. FFO is the key earnings metric for the REIT industry, calculated as GAAP net income, plus real estate gains (minus real estate losses), plus GAAP real estate depreciation and amortization. U.S. real estate represented by UBS coverage universe of U.S. real estate companies from 10/2002 to 12/2010, and Cohen & Steers coverage universe thereafter. Global real estate represented by UBS coverage universe of global real estate companies.

Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The mention of specific sectors is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.

  1. At March 8, 2021. Source: U.S. Centers for Disease Control and Prevention.

Attractive value entering an early-cycle environment

REITs appear cheaply valued relative to stocks

After trailing equities by 25% in 2020, global REITs ended the year at their largest relative discounts since the global financial crisis. Although the value gap has narrowed in the early months of 2021, it remains below the historical average (Exhibit 1). At a time when growth stock valuations are near historical highs, we believe REITs represent an attractive opportunity to diversify portfolios with undervalued, low-correlated assets.

Early-cycle environments tend to favor REITs

Post-recession periods have historically been positive for REIT returns, as these are generally times of accelerating economic growth and supportive monetary and fiscal policies. Since 1991, REITs have outperformed equities in early-cycle expansions on average, both globally and in the United States (Exhibit 2).

An improving economic outlook may drive long-term bond yields higher, raising questions about REITs’ interest-rate sensitivity. Although rising interest rates may create volatility in the short term, we have found that over time, the benefits of stronger real estate demand in an improving economy can outweigh the effects of higher interest rates. We believe REITs today have the added benefit of wide yield spreads to bonds and staggered maturities, which may further cushion the effects of rising rates.

REITs may help defend portfolios against unexpected inflation

For investors concerned about the inflationary effects of large-scale government spending and quantitative easing, real estate offers potential inflation-hedging characteristics. Rising prices for labor, land and materials used in construction can increase the economic threshold for new development. This, in turn, may constrain new supply, supporting higher occupancies and giving landlords greater power to raise rents. As a result, REIT prices have historically responded positively to inflation surprises, compared with the negative impact on stocks and bonds.


REITs historically have outperformed stocks in early-cycle periods
At December 31, 2020.
Source: The Conference Board, U.S. National Bureau of Economic Research (NBER), Morningstar Direct, Cohen & Steers proprietary analysis.

Average of annualized monthly returns (360 total periods), grouped by phase, based on U.S. economic data. Expansion subdivisions determined by Cohen & Steers based on major trends in the Conference Board Coincident Index (CBCI): Early cycle—CBCI accelerating (112 months); Mid cycle—CBCI stable (176 months); Late cycle—CBCI decelerating (41 months). Recessions as reported by NBER (31 months).

Data quoted represents past performance, which is no guarantee of future results. This chart is for illustrative purposes only and does not reflect information about any fund or other account managed or serviced by Cohen & Steers. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations as volatility and other characteristics may differ from a particular investment.

Compelling investment themes in the “new-economy normal”

Although shopping malls and offices have been getting most of the headlines during the pandemic, these sectors make up only a small portion of the modern REIT market (Exhibit 3). Today, we are seeing multiple sources of opportunity.

REITs at the center of the digital economy
the modern reit market offers a diverse opportunity set
At December 31, 2020.
Source: FTSE Nareit, Cohen & Steers categorization of traditional and alternative sectors. Totals may not sum due to rounding.

The mention of specific sectors is not a recommendation or solicitation to buy, sell or hold a particular security and should not be relied upon as investment advice. See page 4 for index associations, definitions and additional disclosures.

(1) Cohen & Steers estimates, 2/28/2021. (2) Cohen & Steers proprietary analysis, 12/31/2020. (3) Company reports, 12/31/2020.


SUMMARY

Vaccines

Safer interactions and easing business restrictions could directly benefit certain REIT sectors impacted by the pandemic, while extraordinary fiscal and monetary policy measures are driving expectations for a sustained economic recovery.

Value

REIT earnings multiples remain attractive compared with broad equities entering what has historically been the most favorable phase of the business cycle for REITs. The value proposition is further enhanced by real estate’s inflation- hedging potential.

Variety of opportunity

The modern REIT market offers access to both secular growth themes and cyclical beneficiaries, enhancing the potential for active managers to add value.

 

CRN: 2021-0407-9080 R

The opinions and views of this commentary are that of Cohen & Steers and are not necessarily that of Advisors Asset Management.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

Index Definitions / Important Disclosures

An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations as volatility and other characteristics may differ from a particular investment.

Global REITs: The FTSE EPRA Nareit Developed Index is a capitalization-weighted, time-weighted index of companies domiciled in developed markets that derive more than half their revenue from property-related activities. Source: London Stock Exchange Group plc and its group undertakings, including FTSE International Limited (collectively, the “LSE Group”), European Public Real Estate Association (EPRA), and the National Association of Real Estate Investments Trusts (Nareit) (and together the “Licensor Parties”). © LSE Group 2021. FTSE Russell is a trading name of certain LSE Group companies. FTSE® and Russell® are trademarks of the relevant LSE Group companies and are used by any other LSE Group company under license. Nareit® is a trademark of Nareit, EPRA® is a trademark of EPRA and all are used by the LSE Group under license. All rights in the FTSE EPRA Nareit Index series or data vest in the Licensor Parties. The Licensor Parties do not accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The Licensor Parties do not promote, sponsor or endorse the content of this communication. Global stocks: The MSCI World Index is a free-float-adjusted index that measures performance of large- and mid-capitalization companies representing developed market countries and is net of dividend withholding taxes. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. U.S. REITs: The FTSE Nareit All Equity REITs Index contains all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. “FTSE®” is a trademark of the LSE Group and is used by FTSE International Limited (FTSE) under license. All rights in The FTSE Nareit All Equity REITs Index vest in FTSE and Nareit. Neither FTSE, nor the LSE Group, nor Nareit accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the FTSE or Nareit is permitted without the relevant FTSE’s express written consent. FTSE, the LSE Group, and Nareit do not promote, sponsor or endorse the content of this communication. U.S. stocks: The Russell 3000 Index (Exhibit 1) is a capitalization-weighted stock market index, maintained by FTSE Russell, that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the 3,000 largest publicly held companies incorporated in America as measured by total market capitalization and represents approximately 98% of the American public equity market. The S&P 500 Index (Exhibit 2) is an unmanaged index of 500 large-capitalization stocks that is frequently used as a general measure of U.S. stock market performance. London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2021. FTSE Russell is a trading name of certain of the LSE Group companies. FTSE®, Russell® and FTSE Russell® are trademarks of the relevant LSE Group companies and are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any market forecast made in this document will be realized. The views and opinions presented in this document are as of the date of publication and are subject to change without notice. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or to account for the specific objectives or circumstances of any investor. We consider the information to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Cohen & Steers does not provide investment, tax or legal advice. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.

Risks of investing in real estate securities. Risks of investing in real estate securities are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest rate changes and market recessions. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties, and differences in accounting standards. Some international securities may represent small- and medium-sized companies, which may be more susceptible to price volatility and less liquidity than larger companies. No representation or warranty is made as to the efficacy of any particular strategy or fund or the actual returns that may be achieved.

Cohen & Steers Capital Management, Inc. (Cohen & Steers) is a registered investment advisory firm that provides investment management services to corporate retirement, public and union retirement plans, endowments, foundations and mutual funds. Cohen & Steers UK Limited is authorized and regulated by the Financial Conduct Authority of the United Kingdom (FRN458459). Cohen & Steers Asia Limited is authorized and regulated by the Securities and Futures Commission of Hong Kong (ALZ367). Cohen & Steers Japan Limited is a registered financial instruments operator (investment advisory and agency business and discretionary investment management business with the Financial Services Agency of Japan and the Kanto Local Finance Bureau No. 3157) and is a member of the Japan Investment Advisers Association. Cohen & Steers Ireland Limited is regulated by the Central Bank of Ireland (No. C188319).

For readers in the Middle East: This document is for information purposes only. It does not constitute or form part of any marketing initiative, any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any products, strategies or other services nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract resulting therefrom. If the recipient of this document wishes to receive further information regarding any products, strategies or other services, it shall specifically request the same in writing from us.


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