We are upgrading REITs to overweight given their well-valued income generating capacity, prospects for relative growth and catch-up potential as the economy recovers from the COVID-related recession. The yield spread between REITs and Treasuries was only greater in the Financial Crisis and analysts peg REITs as having twice the long-term earnings growth of traditional bond proxies.

Unlike Utilities, REIT yields are at the high end of their historical range. We believe this provides a margin of safety should soft rent collections pressure the dividends of some REITs.  Different REIT segments have experienced significant return dispersion this year. Cell towers (infrastructure), data centers, industrial and storage have outperformed; lodging and retail have lagged.

As per retail, the WSJ notes that e-commerce gains made in the past four months rival those of the prior three years. Some consolidation and creative re-imagining of space lies ahead, in our view. Real estate has a solid performance record compared to traditionally defensive sectors in the year following ISM bottoms (including recessions).  Given the impact of COVID on space usage, we believe several REIT sub-sectors may behave more cyclically than they have in the past.