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Is the Coronavirus-Induced Rate Cut a Boon or a Bane for REITs?

Moumita C. Chattopadhyay

In an emergency move, the Federal Reserve has slashed benchmark interest rate to zero on Sunday and announced $700 billion quantitative easing program. This move marks second rate cut in a month — an unprecedented move — in a bid to alleviate credit crunch and market volatility as coronavirus pandemic continues to wreak havoc.

This time, the Fed decided to lower the target range for the federal funds rate to 0-0.25%, down from a prior range of 1-1.25%. Further, the Fed has decided to increase its Treasury securities holdings by at least $500 billion and agency mortgage-backed securities holdings by at least $200 billion over the coming months to shelter the economy and support markets for Treasury securities and agency mortgage-backed securities, which are vital for credit flow to households and businesses.

Apart from these, the Fed has undertaken a number of concerted efforts, including coordinated action with other central banks to boost the provision of liquidity though the standing U.S. dollar liquidity swap line arrangements. Moreover, the other line of actions comprises measures related to the discount window, intraday credit, bank capital and liquidity buffers and reserve requirements.

The latest efforts of Fed to combat the adverse impact of the coronavirus pandemic on economic activity in the near term and the long-term economic outlook have, however, received an initial negative response from the market. In fact, Dow futures is indicating a decline as the move is being viewed as a sign of panic.

Concerns regarding COVID-19 impact on the U.S. economy are keeping investors on tenterhooks. As volatility flared up in the market and investors rushed to safe-haven assets, the bond market came under immense pressure leading to the Treasury yields sinking to record lows.

Here’s What This Means for REITs

Obviously this emergency rate cut brings REITs on the forefront as these companies are often treated as bond substitutes for their high-dividend paying nature. Moreover, REITs’ dependence on debt for business keeps investors optimistic about their performance in case of a rate cut due to lower borrowing costs. Also, REITs have ownership of properties in the nation and this domestic focus, apart from the rate cut, instills hope for better performance by REIT stocks.

Nonetheless, as the number of coronavirus infections globally continues to rise, it has become apparent that not all REITs are immune to the virus’ impact.

The lodging REITs in particular are bearing the brunt due to massive cancellations by both businesses and vacationers, forcing Host Hotels & Resorts Inc. HST and several others to withdraw their outlook for the current year. Mall REITs too might be affected as an outbreak results in consumers preferring to avoid gathering at large public places.

However, with REITs catering to different asset class, there are chances of gaining elsewhere. In fact, the dependence on data centers for Internet continuity by corporates and increase in online shopping makes the data center REITs, including Digital Realty Trust DLR and Equinix EQIX, stand out in this market rout. Also, healthcare REITs catering to assets like medical office buildings and hospitals are well poised with operators benefiting from rising visits of patients.

Further, tower REITs like American Tower Corp. AMT and others are likely to remain least impacted with no human contacts at sites as well as rising demand amid increasing mobile-data usage and higher investments in 4G and 5G technologies.

Currently, Host Hotels, Digital Realty Trust, Equinix and American Tower carry a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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