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Will REITs Gain or Lose on the Coronavirus-Induced Rate Cut?

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In a surprising move, the Federal Reserve announced a cut in its benchmark interest rate by half a percentage point, to between 1% and 1.25%, on Tuesday to combat the “evolving risk to economic activity” thanks to the coronavirus scare. The central bank deems this move a strategic fit to support achieving “its maximum employment and price stability goals”.

However, the rate cut, this time, failed to boost business confidence and appease investors. Rather, this first inter-meeting cut in more than a decade has reignited fears among investors as the move is being viewed as a sign of panic. Concerns over the crippling COVID-19 impact on the U.S. economy are keeping investors on their toes.

Investors have been flocking to safer-haven assets, of late, and there was immense pressure on the bond market, resulting in the yield on the U.S. 10-year Treasury to sink below 1% on Tuesday. Volatility flared up in the market and the Dow Jones Industrial Average finally tanked 786 points, or 2.94%, during the session, while the S&P 500 and Nasdaq Composite also depreciated 2.81% and 2.99%, respectively.

This emergency rate cut, undoubtedly, brings REITs on the forefront as these companies are often treated as bond substitutes for their high-dividend paying nature. Moreover, REITs’ dependence on debt for business keeps investors optimistic about their performance in case of a rate cut thanks to lower borrowing costs.

Therefore, though all the 11 sectors ended in red on Tuesday, real estates witnessed the lowest declines. REITs were hit but fared better than the market because many of these companies have ownership of properties in the United States itself. This domestic focus, apart from the rate cut, infuses hopes for better performance by REIT stocks.

Nonetheless, as the number of coronavirus-infected cases in the nation continues to rise and the spread outside of mainland China, from South Korea to Italy, continues, it has been noticed that not all REITs are immune to the virus’ impact.

The lodging REITs are particularly bearing the brunt due to massive cancellations by both businesses and vacationers. Tourism has been the worst affected amid travel restrictions and lodging REITs were down 4.97% on Tuesday.

Earlier this week, Host Hotels & Resorts Inc. HST announced that its operations have been adversely impacted by the coronavirus outbreak, with the company's shares tanking more than 5% on Tuesday. Also, shares of Ryman Hospitality Properties, Inc. (RHP - Free Report) slipped more than 6.5%. (Read more: Will Coronavirus Hurt Host Hotels' Performance This Year?)

Moreover, mall REITs might be equally hit hard. Remarkably, this asset category has already been reeling under store closure and bankruptcy issues. Now, with consumers preferring to avoid gathering at large public spaces, mall REITs remain in tenterhooks. As such, during yesterday’s session, Regional Malls too declined a significant 3%, with Simon Property SPG depreciating 3.73%.

Furthermore, turbulent market conditions, thanks to competition from European salvage volume, and near-term impact of the coronavirus outbreak has affected timber REIT Rayonier RYN, causing the stock to slip more than 2% yesterday.

Nevertheless, the magnitude of the overall impact on the U.S. economy remains uncertain as of now. While the easing stance of monetary policy targets providing some support to the economy, mounting pressure is anticipated on the politicians for fiscal measures in the United States, as well as in other economies. And any effort to boost economic activities spurs demand for real estate, driving occupancy and rents, in turn, helping REITs’ earnings, cash flow and dividend gain strength.

Currently, Host Hotels, Ryman Hospitality and Rayonier carry a Zacks Rank #3 (Hold), while Simon Property holds a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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