Recessions are a challenging time for everyone, but they can be especially difficult for investors. Tightened budgets lead to reduced consumer spending and thus a lack of economic activity. Add in the unknown length and severity of the recession and it's understandable why it's a challenging time to invest.
Thankfully, some industries are more resistant to these challenges, rebounding quicker or enduring less impact. Strategic exposure to these industries can help your portfolio survive recession hardships, and that's precisely why Kimco Realty (KIM 2.59%), Public Storage (PSA 0.04%), and Physicians Realty Trust (DOC) should be on your buy list for the next recession.
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Kimco
It may surprise you to see a retail REIT on this list of recession-resilient industries -- after all, retail spending is one of the first things to falter when the economy slows. But Kimco Realty is somewhat of a unicorn in the world of REITs thanks to its diverse mix of essential and necessity-based tenants.
Necessity-based tenants, which can include grocery stores, pet supply stores, and home or auto repair stores, are more likely to survive and thrive in a recession due to the nature of their business. While Kimco's portfolio isn't exclusively leased to essential-based tenants, 80% of its average base rent is derived from grocery-anchored retail centers, which is huge. This helps reduce the company's risk exposure and helps drive traffic to its retail centers because people will visit more frequently as they shop for groceries.
The company has also been doing increasingly well as it continues to recover from pandemic-related impacts. Rent per square foot is 7% higher than pre-pandemic levels and comparable lease spreads are at the same levels as the start of 2020. Its occupancy has risen consistently for the past four quarters, now sitting at just over 94%.
It's also got a lot going for it in terms of its portfolio. As of Q1 2022, it had 537 properties, the majority of which are open-air -- great as consumer preferences shift toward this as their preferred method of shopping. It's also well positioned in some of the fastest-growing sun belt markets and big coastal cities.
The one thing I don't love about Kimco is its debt ratio. While not out of control currently at 6.4 times its debt-to-earnings before taxes, interest, depreciation, and amortization (EBITDA), it could be better. But the company is actively dedicated to reducing its debt exposure over the next few quarters. Its share price has well exceeded its pre-pandemic levels, but still trades at a steal for REITs at around 10 times its funds from operations (FFO). Buying today means you're not only buying at a discount but also securing a dividend yield of just under 3%.
Public Storage
Recession hardships like relocation due to a job loss or downsizing to save money mean new customers in the self-storage business, making this one of the best industries to invest in during a recession. Aside from its ideal business model for tough times, self-storage has consistently been the top-performing industry for all REIT sectors for 25 years.
Public Storage is the leading self-storage REIT and the largest operator in the business. At the start of 2022, it owned or had an interest in nearly 2,800 facilities in 39 states as well as interest in facilities located across Western Europe. Thanks to Public Storage's recent shopping spree, it notably expanded its portfolio over the past two years through the acquisitions of ezStorage, All Storage, and several others. This, in addition to higher demand for storage space, has helped rental rates increase in addition to all key metrics used to evaluate a REIT's profitability like FFO, net operating income (NOI), revenue, and gross profit margin.
It's also cash heavy with a super low debt to EBITDA ratio of 1.98. By REIT standards, that is a great position to be in during a recession. Having capital on hand can help Public Storage not only ride through tough times but expand while others conserve cash. Public Storage share prices are up 42% over the last three years, but thanks to its portfolio growth it's still favorably valued by REIT standards at around 20 times its FFO.
Physicians Realty Trust
People's need for medical care doesn't stop just because times are tough. In fact, history has shown us that medical spending can increase during a recession. While many other industries are cutting jobs, medical care jobs and demand remain steady. The key is having the right exposure to the medical field.
Physicians Realty Trust is a diversified healthcare REIT that owns 291 medical office centers leased to a variety of tenants in the medical field. These include medical research and development, doctor's offices, in-patient and outpatient care, intensive care, and hospitals. Its diversity in the industry is a major asset because it's not solely relying on one field to carry its revenue. It also has the added benefit of being in the majority sector for patient care. In 2021, 67% of all claims filed were made outside a hospital, from medical centers not unlike the ones Physician's Realty Trust owns and leases.
Despite the challenges brought to the medical field in the wake of the pandemic, Physicians Realty Trust was able to maintain steady revenue growth. Although its NOI and FFO are not growing by much, CEO John Thomas sees the tides changing. Increased costs for renovations are limiting the amount of medical space for rent, which in turn is driving up lease rates organically and should hopefully give the company a larger profit margin moving forward.
Physicians Realty Trust has one of the lowest debt-to-EBITDA ratios within the healthcare industry, at 5.65 times its EBITDA, and has $2 million in liquidity. Share prices have almost recovered to pre-pandemic levels, down 3% from three years ago. But the company is still well valued, trading around 17 times its FFO with a nearly 5% dividend return.
