If you're worried about a wobbly economy, join the club. With borrowing costs and inflationary pressures rising, the near-term outlook is cloudy. Things are even worse in most overseas markets. Investors have been flocking to real estate investment trusts (REITs) as safe havens with decent yields, but some are better suited to handle an economic downturn than others.
Realty Income (O 1.94%), Tanger Factory Outlet Centers (SKT -0.56%), and Life Storage (LSI) are three REITs that I think can weather the next recessionary storm. Let's see why I think these three investments might hold up better in today's environment.
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Realty Income
There's no shortage of REITs that dabble in retail and commercial real estate. The pressure point there is that office buildings and premium shopping malls aren't likely to fair too well when businesses are holding back on in-person hires and folks aren't comfortable going on shopping sprees. Analysts are already seeing hints of the latter scenario, as the rise in food costs is leaving less money around for discretionary spending.
Realty Income is a good name to consider among retail REITs. Its top three industries as a percentage of contractual rent are grocery stores (10.5%), convenience stores (9.2%), and dollar stores (7.4%). Supermarkets are naturally a steady place during an economic funk. People need to eat, and they may be eating more at home when money's tight. Convenience stores have also generally held up well, even if people aren't pumping as much gas into their cars as they would when the going is good. Dollar stores offer the deep discounts that soft markets covet.
The REIT has stood the test of time. It has boosted its payout for 27 consecutive years. The Dividend Aristocrat also issues monthly distributions. Its 4.4% yield may not seem so hot if rising rates on interest-bearing savings accounts keep climbing, but it's attractive right now.
Tanger Factory Outlet Centers
Another angle that could hold up well in a recession is buying into outlet centers. Tanger Factory Outlet Centers operates 37 shopping centers filled with factory outlet stores. Its portfolio cashes in on the 2,700 stores across more than 600 different brands that take up its 14 million square feet of available space.
Outlet centers work both sides of the recessionary pinch. Consumers seek the deep discounts of clearance and overstock items from brands they know. Then there are the brand stores that have a lot inventory they can't sell at full price during a downturn, so they funnel that merchandise to their factory outlet stores. The only trouble spot is when the full-priced storefronts of a tenant falter to the point that it has to file for bankruptcy.
Tanger suffered early in the pandemic when its shopping centers were shuttered on health concerns, but it's rolling now. Its occupancy rate of 94.9% in its latest quarter is closing in on the 96% it had for the same period three years ago, but its tenants are faring even better. The average tenant sales productivity for its consolidated portfolio was $450 per square foot for the trailing 12 months ending in June, up sharply from the $395 average it was reporting three years ago. It also boosted the low end of its full-year guidance this summer.
Tanger's yield of 5.1% is respectable, and it could get even better. The core funds from operations Tanger expects to earn this year is more than double its current distribution rate. It's a business built for recessions.
Life Storage
Let's wrap this up by taking a look at the self-storage industry. There are a couple of REITs backed by self-storage facilities. They've fared well during the COVID-19 crisis, as a more mobile workforce is able to secure belongings at a storage facility and travel. An economic downturn isn't going to get in the way of the industry's growth, and it's an obvious winner if things sour to the point that folks have to downsize their homes and keep essentials in a self-storage facility.
Life Storage operates more than 1,100 storage facilities across 36 different states. Low overhead makes it a lucrative niche, and running mostly on month-to-month leases makes it easier to nudge rates higher over time. Revenue and funds from operations rose 19% and 38%, respectively, in its latest quarter.
