Investing

Why One Red-Hot Sector Is Almost Totally Immune to Tariffs and Trade

Lee Jackson

Published: June 5, 2019 7:55 am

Last Updated: January 30, 2020 8:00 pm

The chorus of doom and gloom over the president’s trade tactics gets worse almost daily, even though the efforts likely will lead to some big and positive changes in how the United States is treated in global trade. China ultimately has much more to lose than the United States, and it’s a given the European Union doesn’t want stiff car tariffs on popular European car imports.

Until deals are finally made, investors will face the continued daily drone from politicians, financial news pundits and many others. So what are whipsawed investors to do? Here’s a hint: location, location, location.

That’s right, real estate is a great place to look now. Even though the sector has been on fire, there are still numerous reasons to consider investing. Here’s why according to Sean Darby from Jefferies:

1. Real estate is domestically focused, immune from tariffs and not exposed to the strength of the U.S. dollar.
2. Investors have been underweight the sector, concerned over higher rates, an anomaly given the 10-year Treasury yield is the lowest since 2014.
3. There have been no signs of delinquencies.
4. First-quarter earnings were positive, with upward earnings revisions, for industrial and apartment real estate investment trusts (REITs). Positive momentum was seen from the self-storage sector as well.

One way for investors to play the sector is to buy the Real Estate Select Sector SPDR Fund (NYSE: XLRE). In its top 10 holdings are numerous data center REITs, some of which have big overseas exposure. So we focused on the fund’s largest holdings that are real estate giants here at home, which do have some limited overseas exposure. We found five that make sense for investors looking for safety and income.

Prologis

This industrial REIT has some foreign exposure, but it pales in comparison to the U.S. holdings. Prologis Inc. (NYSE: PLD) develops and manages the largest global portfolio of industrial real estate, concentrated in major port markets, for global trade, regional distribution markets and large population centers.

The portfolio concentration is about 80% in the Americas, 17% in Europe and the remainder in Asia. However, more than 90% of the company’s equity is priced in U.S. dollars, mitigating currency risk to earnings. Prologis also operates the largest industrial property fund platform for large institutional investors.

Investors receive a 2.83% distribution. The Wall Street consensus price target for the shares is $78.19. The stock closed Tuesday at $75 a share.

Public Storage

This self-storage leader always has been a go-to REIT stock for investors. Public Storage Inc. (NYSE: PSA) is a fully integrated, self-administered and self-managed REIT that primarily acquires, develops, owns and operates self-storage facilities.

As of March 31, 2019, PSA had interests in 2,444 self-storage facilities located in 38 states, with approximately 164 million net rentable square feet in the United States and 35% equity interest in Shurgard, which owned 231 storage facilities located in seven Western European nations, with approximately 13 million net rentable square feet.

Investors receive a 3.35% distribution. The consensus price objective is $206.25, but shares closed way above that level Tuesday at $237.70.

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Welltower

This one pays a solid distribution and is a play on the aging U.S. population. Welltower Inc. (NYSE: WELL) is a fully integrated and self-administered REIT invested across the full spectrum of health care real estate

The company also offers property management and development services. As of last year, Welltower had ownership interests in nearly 1,400 facilities in high growth markets in the United States, the United Kingdom and Canada, across senior housing triple-net, senior housing operating, skilled nursing/post-acute and medical office buildings.

Shareholders receive a 4.35% distribution. The $78.56 consensus price target compares with the most recent close at $80.06.

Equity Residential

This apartment REIT company owns properties in high-growth U.S. cities. Equity Residential Inc. (NYSE: EQR) is an S&P 500 company focused on the acquisition, development and management of high-quality apartment properties in top U.S. growth markets.

As of March 31, 2019, it owns or has investments in 310 properties, consisting of 80,061 apartment units located primarily in Boston; New York; Washington, D.C.; Seattle; San Francisco; southern California; and Denver.

The company recently provided an update on its operations for the second quarter. Revenues are trending toward the high end of guidance and New York; Washington, D.C.; Boston and Seattle performed better than expected. Base rents trended slightly better than expected to date. Occupancy ran above 2019 forecasts.

The company pays investors a 3.01% distribution. The consensus price target is $74.85. Shares last traded at $75.48.

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AvalonBay Communities

This is another top apartment REIT. AvalonBay Communities (NYSE: AVB) develops, acquires and manages high-quality apartment communities. As of March 31, 2019, it owned or held a direct or indirect ownership interest in 291 apartment communities, containing 85,313 apartment homes in 12 states and the District of Columbia, of which 19 communities were under construction and nine communities were under redevelopment.

The company announced this week that total rental revenue for established communities for the two months ended May 31, 2019, increased 3.4% over the prior-year period. This is 40 basis points above what AvalonBay’s expectation was for total rental revenue growth during this period when the company published its outlook for the full year.

Investors receive a 3% distribution. The consensus price target is $207.35, and shares closed at $202.67.

Five top companies, some of which have limited overseas exposure but do the great percentage of corporate business right here at home. Given the safety and dependable income, they all make sense for nervous investors. Note that they all have had a big run, so scale-buying when they pull back some makes sense.