Real estate has always been one of the most reliable sources of long-term wealth but while a portfolio of real estate is out of reach for most investors, Real Estate Investment Trusts (REITs) provide an alternative way to get exposure to the housing market.
2020 brought enormous suffering to several stock market sectors, but it also offered opportunities for many businesses.
Falling occupancy rates and missing rent payments hammered REITs, forcing several to slash their dividends.
In 2020, the S&P 500 ended with a gain of about 20%, and the REIT sector (VNQ) declined 5%. However, when REITs resurfaced in 2021, the roles reversed; The Vanguard REIT ETF gained 40.5%, surpassing the S&P 500’s gain of 28.7%.
As investors, we’ve been through a lot in the last few years and now face new challenges. High inflation, geopolitical uncertainty, and rising interest rates are just a few examples.
The latter is where most REIT investors concentrate their efforts.
Five REITs for Your Watchlist
REITs took advantage of the slump by diversifying their portfolio and increasing their geographic footprint. We’ve seen a lot of consolidation in the sector, and we don’t think it’ll slow down anytime soon.
With rising rates, it is a great time to invest in REITs. Below are five of the best REITs for your watchlist.
1) Realty Income
Realty Income, often known as The Monthly Dividend Company, is one of the most well-known REITs. The sector has seen a lot of consolidation, which includes Realty Income.
After completing the VEREIT transaction, the business announced the acquisition of $1.7 billion in casino assets from Wynn Resorts.
The change moves Realty Income into the gaming industry, which is good news for another pick I have below.
Realty Income is attractive because of its strong balance sheet and because they have the potential for solid growth in the coming year, despite rising interest rates.
The company is aiming to extend its footprint both domestically and globally. Realty Income stands out because of its low cost of capital, which allows them to create large investment spreads.
The stock is now trading at a favorable 17.1x forward P/FFO, and shares have traded closer to 19x P/FFO during the last five years.
The company delivers a safe dividend yielding 4.4% and has already paid 620 consecutive monthly dividend payments.
2) Simon Property Group
The next REIT is Simon Property Group (SPG), which has the most extensive and best portfolio of mall properties, with numerous class-A malls.
When SPG purchased TCO at the end of 2020, it became yet another REIT to increase its portfolio through acquisition. SPG’s stock rose by 95% in 2021.
Korpacz Realty Advisors classifies malls based on the retail sales per square foot malls have, grading them between A+ to D. before the pandemic, SPG had retail sales per square foot of $693 throughout their whole portfolio, putting them in the A-rated category.
In Q4 2021, sales per square foot at SPG’s mall and outlet facilities surpassed pre-pandemic highs, reaching $713 per square foot.
Mall portfolios that have failed or closed are class C+ or lower, and only a few class-A malls are permanently closing their doors.
Simon Property Group has a competent management team, including CEO David Simon, who has led the company through many different economic cycles since 1995.
SPG’s stock had a great year in 2021, but 2022 has been the polar opposite – SPG’s stock is down about 20% year to date. Perhaps now could be a good time to buy?
3) VICI Properties
As we saw above, companies like Realty Income are joining the gaming real estate business, which could bode well for VICI Properties, the market leader. The gaming industry is highly specialized, with a greater moat and floor than other net-lease REITs.
VICI and MGM Growth Properties are two of the most well-known gaming REITs (MGP). MGP controls significant Las Vegas properties such as the MGM and Mandalay Bay.
VICI Properties announced in August 2021 that it would buy MGP for $17.2 billion, making it the largest landlord on the Las Vegas strip.
The unmet demand for VICI-owned properties is enormous, and it will be a significant driver for the company.
VICI is now trading at a 13.9x FFO multiple. When we compare other top net-lease REITs, we see that they trade at around 18x FFO, but the growth that will occur within VICI is substantially higher, making VICI shares more appealing.
4) Medical Properties
During the pandemic, Medical Properties Trust was one of the best-performing REITs.
During the pandemic, their properties were in demand; however, that’s not the case for properties that housed elective procedures which struggled.
MPW is the most powerful participant in the hospital real estate market since they possess the world’s most extensive portfolio of non-government-owned hospital facilities.
The company’s acquisition model allows hospital operators to be more flexible and preserve facilities in the best possible condition because they are not investing large funds in the actual real estate.
The company has a strong balance sheet, but I’d want to see them continue to strengthen their debt reduction efforts, which they have been successful in achieving.
Another risk that investors mention when it comes to MPW is tenant risk, which means they have a lot of exposure to a few tenants. Nonetheless, the top two tenants contribute 4.5% of the REIT’s yearly base rent.
Shares are down 15% year to date and, in my opinion, represent a good long-term investment. MPW stock presently has a forward P/FFO of 10.9x, and it has traded closer to 11.4x over the last five years.
5) Public Storage
The final REIT we’ll look at today comes from the self-storage industry, which has been on fire in recent months. PSA stock has surged by an incredible 55% in the last year.
Even for a growth stock, that would be impressive, but that is exceptional for a REIT. The stock is up 2% to date, while the S&P 500 is down 6%.
With a market capitalization of $65 billion, Public Storage is the largest self-storage REIT in the United States. PSA manages around 2,800 properties in 39 states, serving 1.8 million clients.
Public storage has a solid management team that runs the company successfully and efficiently from a financial standpoint. As a result, Moody’s and Standard & Poor’s have assigned the company an A2 and A credit rating, respectively.
PSA shares are currently trading at a forward P/FFO of 24x, compared to a 5-year average of 21.2x. If anything, take tiny steps or add the firm to your watchlist if the stock drops.
Investors wishing to boost their passive income might consider REITs. Given that REITs must share at least 90% of their taxable profits each year, the sector offers attractive yields.
The five REITs we’re talking about today all have one thing in common: they’re all high-quality. When considering funds from operations, all but Public Storage, which is coming off a tremendous 2021, are selling below their five-year average.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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Tim Thomas has no positions in the stocks, ETFs, cryptocurrencies, or commodities mentioned.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Unsplash.