BCA Research Says The Economy Is On The Brink Of Recession, But These REITs Could Still Thrive

Most Wall Street analysts expect the U.S. to be able to avoid a recession as the Federal Reserve begins lowering interest rates. But investment research firm BCA Research has stuck its neck out to predict that the U.S. is about to fall into a recession and that the coming interest rate cuts will be too little, too late, to prevent it.

Garry Evans, BCA's chief global asset allocation strategist, told CNBC's "Squawk Box Asia" the other day that the economy is now breaking down and the labor market is deteriorating.

Evans added that a few rate cuts in 2024 cannot prevent a recession because when the FED cuts rates, it can take about a year for the economy to see a positive impact.

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Two consecutive quarters of decline in the economy typically define a recession. The average one can last 10 months to a year and a half. Although the U.S. is not officially in recession, a recent survey by Affirm Holdings Inc. AFRM showed that 60% of Americans think it is. That belief can become a self-fulfilling prophecy as consumers begin to reduce spending. Consumers are already struggling with record-high credit card debt and fees. Inflation has robbed many consumers of the savings they had accumulated during the COVID-19 pandemic.

Some real estate investment trusts (REITs) will perform poorly during a tough recession, but others may thrive. REIT subsectors such as retail, office and industrial may languish as tenants shut down businesses, leading to higher occupancy rates and reduced rental revenue. Hotel REITs could also suffer as consumer and business traveling diminishes.

However, some REITs can handle a recession and may even perform better. Those who serve a substantial need, such as health care or working with an attractive niche during hard times, should prosper.

The health care REIT subsector should continue to perform well in a recession. People still need medical care no matter how the economy fares and health care REITs can refinance debt at lower levels to boost overall funds from operations. Two in particular stand out both in recent price performance and in dividend yield:

American Healthcare REIT

American Healthcare REIT Inc. AHR is a newcomer to the REIT sector. The Irvine, CA-based self-managed Healthcare REIT owns and operates a portfolio of 318 properties across 36 states and in the U.K. Its portfolio includes clinical health care properties such as medical buildings, senior housing, skilled nursing facilities (SNF) and hospitals.

American Healthcare REIT was formed in 2021 and has had a total return of 57.19% since its IPO in January 2024. Since Aug. 1, its gain of 26.20% leads all health care REITs. In addition, American Healthcare's $1.00 per share quarterly dividend yields 4.91%. 

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Omega Healthcare Investors 

Omega Healthcare Investors Inc. OHI is a Hunt Valley, MD, triple-net equity health care Real Estate Investment Trust (REIT) that provides financing, capital and triple-net leasing to 77 different operators among 900 senior housing, skilled nursing, and assisted living facilities in 42 states in the U.S. and the United Kingdom.

Omega Healthcare Investors has operators who provide the day-to-day management of these facilities. Texas and Indiana are a few states with the largest Omega facilities.

One of Omega Healthcare's strengths has been its quarterly dividend of $0.67 per share, which presently yields 6.98%. The $2.68 annualized dividend will become even more attractive to income investors as interest rates move down on CDs, money markets and treasuries.

Residential REITs are another subsector that has done well in 2024 and could continue to thrive in a recession, but only if the downturn is not extreme. In the recession of 2007, so many tenants were laid off that it decimated the occupancy levels in middle-income apartment complexes.

However, one residential REIT, UMH Properties Inc. UMH, based in Freehold, NJ, rents and sells properties in 2,500 manufactured home communities across a dozen states. UMH has been in business since 1968 and had its IPO in 1985. 

A recession could boost UMH Properties because manufactured homes cost far less than single-family homes and are cheaper to rent than apartments. Lower interest rates alone will not solve the problem of a lack of affordable housing in the U.S. without a major decline in home prices.

One unique perk in UMH manufactured home communities is self-storage facilities managed by UMH staff on premises. UMH Properties also has licensed Mortgage Professionals to help finance the sales of its manufactured homes.

Over the past four weeks, UMH Properties climbed 11.61%, and its $0.215 per share quarterly dividend yields 4.43%. It has raised the dividend several times over the past three years.

If BCA Research is right, a U.S. recession may be unavoidable. Recessions have historically created difficult times for Wall Street. However, having strong recession-resistant REITs such as the aforementioned in one's portfolio can help weather the storm. 

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