Your REIT Recession Playbook
The debate over whether America is due for another recession has been ongoing through early 2016, with the predominating opinion being the seven-year-old bull market is shying away for an incoming bear.
Expert opinions echo the sentiment that the evidence is still murky, it's better to be prepared than caught off guard. Cowen & Co publicized early February that the firm is "not yet fully convinced that the U.S. is falling into a recession," but went on to provide a note "helping investors prepare for a recession scenario," Benzinga previously reported. Similarly, Estimize proclaimed that a revenue recession is upon us, due to underwhelming Q4 earnings.
Therefore, it comes as no surprise that Goldman Sachs has issued a research note regarding REITs' likely performance in an imminent recession.
'Throwback To 2009'
"Concerns remain top of mind to investors that recession risks – both economic and financial – have increased," Goldman Sachs began. "While the odds of a US recession are only 18 percent and 23 percent over the next one and two years respectively, according to our Economic Research team, for context we provide sensitivity to individual REIT valuation downside in the event of a recession."
The analysts emphasized two propelling stresses to their downside valuation:
- 1. Earnings Shock: "We assume 2017 NOI declines are similar to 2009 levels."
- 2. Multiple Shock: "We assume 2017 multiples are similar to 2H09 levels."
"In our recession scenario, we estimate a 22 percent downside to current prices," the analysts explained.
Areas To Watch
Goldman Sachs then mentioned four REIT subsectors that would likely be influenced in a recession scenario: strip centers and storage having the largest downside, and outlets and healthcare seeing the smallest downside.
"Interestingly, there is not a strong correlation between recession valuation downside and leverage," according to the analysts, "thus our analysis does not suggest investors should simply purchase low leverage stocks at the expense of high leverage stocks."
Based upon these assumptions, Goldman Sachs mentioned the following as low-leverage stocks with above-average downside risk:
- Equity Residential (NYSE: EQR)
- Extra Space Storage, Inc. (NYSE: EXR)
- Public Storage (NYSE: PSA)
- Realty Income Corp (NYSE: O)
And the largest "absolute NOI decline and FFO decline" would be seen in AvalonBay Communities Inc (NYSE: AVB) and Equity Residential, with the greatest decline in FFO coming from Extra Space Storage.
Broadly speaking, Goldman Sachs sees the following names as having the most downside in a recession:
- General Growth Properties Inc (NYSE: GGP)
- Terreno Realty Corporation (NYSE: TRNO)
- Prologis Inc (NYSE: PLD)
- DDR Corp (NYSE: DDR)
- Extra Space Storage
- Public Storage
- Macerich Co (NYSE: MAC)
And the following names as having the least downside in a recession scenario:
- Care Capital Properties Inc (NYSE: CCP)
- HCP, Inc. (NYSE: HCP)
- Omega Healthcare Investors Inc (NYSE: OHI)
- Ventas, Inc. (NYSE: VTR)
- Medical Properties Trust, Inc. (NYSE: MPW)
- Tanger Factory Outlet Centers
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