Morgan Stanley pinpoints 18 real-estate stocks that are beating the market this year even as the broader sector underperforms — including the sub-sectors benefiting from the coronavirus crisis

  • Despite a broader sector underperformance, 18 real-estate investment trusts representing about 40% of the industry market cap are beating the S&P 500 this year, according to Morgan Stanley analyst Richard Hill. 
  • Hill explains that stock selection matters as a K-shaped recovery takes place in the commercial real estate market and subsectors benefiting from the pandemic have generated positive returns. 
  • Additionally, David Grumhaus, senior portfolio manager at Duff & Phelps shares why the REIT sector is still a good place to be for the rest of the year given its stable dividend yields and diversification benefits.
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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%

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