The U.S. real estate investment trust, or REIT, sector was hit abnormally hard during the 2022 bear market. With dividends reinvested, the benchmark SPDR S&P 500 ETF (ticker: SPY) lost 18.2% last year. In comparison, the iShares Core US REIT ETF (USRT) fell 24.4%.
The culprit? Rising interest rates. “Among the many risks associated with REITs, macro factors like interest rate changes have a major impact on their ability to raise capital and the underlying value of their properties,” says Richard Gardner, CEO at financial technology firm Modulus Global.
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That said, some real estate experts are bullish on a rebound for 2023. “After a difficult year where the 250-basis-point rise in corporate bond yields caused a widespread valuation reset, this year is setting up to be an improved environment for public REITs,” says Bob Thomas, co-head of Americas real estate securities at DWS Group.
For investors seeking affordable real estate exposure without the capital or time required to get a rental property going, REITs can be a great alternative. Holding REITs can be a smart way of generating higher-than-average passive income, especially in a tax-advantaged account like a Roth IRA.
“To qualify as a REIT, the trust must distribute at least 90% of its taxable income to shareholders, which in turn allows them to avoid paying corporate income taxes since their earnings have been passed to the end investor as a dividend payment,” says Rohan Reddy, director of research at Global X ETFs. “This unique structure can increase the yields received by the end investor,” he says.
Another reason investors include REITs in their portfolio is due to their diversification potential. “REITs often have had a low correlation with other asset classes, meaning that it offers investors a great way to diversify their portfolio,” Gardner says. This, combined with the tendency to pay high yields, makes them a good investment for income-oriented investors looking to augment dividend stocks in their portfolio.
Here’s a look at nine of the top REITs experts are bullish about in 2023:
— Ventas Inc. (VTR)
— Gaming and Leisure Properties Inc. (GLPI)
— Iron Mountain Inc. (IRM)
— Public Storage (PSA)
— Prologis Inc. (PLD)
— American Tower Corp. (AMT)
— Blackstone Mortgage Trust Inc. (BXMT)
— Realty Income Corp. (O)
— Easterly Government Properties Inc. (DEA)
Ventas Inc. (VTR)
“We are focused on REIT sectors and companies that are seeing accelerating earnings or funds from operations, or FFO, growth,” Thomas says. “With this in mind, we really like health care REITs with exposure to senior housing,” he says. A great example of this is VTR, which owns senior housing communities, medical office buildings and research centers.
“Senior housing REITs saw significant headwinds from the pandemic due to lower occupancy and higher labor costs,” Thomas says. Thomas is anticipating a yet-to-be priced-in rebound for these REITs, noting that “senior housing is one of the last REIT subsectors still recovering from COVID.” Investors interested in this theme may like VTR, which currently pays a 3.7% yield.
Gaming and Leisure Properties Inc. (GLPI)
“Additionally, we also like gaming REITs, which are largely net-lease-external growth vehicles,” Thomas says. “With the rise in interest rates, private equity and private REIT buyers don’t have the cost of capital to compete with gaming REITs for acquisitions, which could potentially give these REITs a strong runway for external growth,” he says.
A great example of a gaming REIT is GLPI, which owns and operates 57 casino-resort facilities across 17 states. The REIT recently released earnings, detailing record fourth-quarter results. GLPI also rewarded shareholders with a special dividend of 25 cents per share in addition to its 2023 first-quarter dividend of 72 cents per share. The REIT currently yields 5.4%.
Iron Mountain Inc. (IRM)
Investors willing to look beyond the usual REIT sectors like office, retail and health care can potentially find some hidden gems in specialty sectors. “Our favorite is in the document storage space where industry leader IRM has a very attractive setup for 2023,” Thomas says. This REIT offers secure records storage, shredding and information management services for businesses around the world.
“IRM’s legacy document storage business has long been a short-seller target over fears that digitization would make this business obsolete,” Thomas says. “The opposite is playing out as document retention remains important in many regulated businesses and IRM has found its pricing power accelerate in this legacy core business,” he says. IRM currently pays a 4.7% yield.
[READ: 8 Financial Stocks to Buy as Interest Rates Rise.]
Public Storage (PSA)
IRM provides storage services to businesses, who rely on it for a secure way to dispose of and archive sensitive documents. On the consumer side is PSA, which owns, operates and leases over 2,500 self-storage facilities across 38 states, spanning 170 million square feet of space. The REIT is also a constituent in the S&P 500 and the FT Global 500 index since it is a large-cap company possessing high liquidity.
PSA recently reported annual earnings for 2022, highlighting a 23.7% increase in core FFO from 2021, acquisitions of 74 more facilities with 4.7 million net rentable square feet of space, and the launch of eight new facilities. The company recently announced a dividend of $3 per share for a yield of 4.1%.
Prologis Inc. (PLD)
Another specialty REIT is PLD, a vital player in retail sector supply chains. Currently, PLD owns and leases 984 million square feet of facility space dedicated to satisfying the shipping and fulfillment needs of e-commerce tenants like Amazon.com Inc. (AMZN) and FedEx Corp. (FDX). The REIT has a global presence, with facilities in 19 countries.
The company’s strong recent growth has benefited shareholders immensely. From June 2007 to January 2023, PLD returned an annualized 9% with dividends reinvested, compared to 6.4% for the wider REIT market as measured by USRT. Recently, the board of directors approved an increase in the REIT’s annualized dividend by 10% to $3.48 per share, putting PLD’s current dividend yield at 2.8%.
American Tower Corp. (AMT)
Investors looking for infrastructure exposure in a REIT holding might like AMT, which owns and leases telecommunications towers and data centers. The REIT’s current portfolio totals 223,000 sites, with 43,000 located in North America and 180,000 internationally. In addition to traditional wireless and broadcast services, AMT has also expanded into 5G.
AMT recently reported its full-year financial results for 2022, which included a 14.5% increase in revenue but also a 33.9% decrease in net income. CEO Tom Bartlett highlighted the REIT’s ability to capitalize on its December 2021 acquisition of CoreSite, which at the time significantly expanded AMT’s data center services. AMT currently pays a yield of 3.2%.
Blackstone Mortgage Trust Inc. (BXMT)
REIT investors looking to maximize yields can consider mortgage REITs, which are a special type of REIT that do not own or lease properties. Instead, these REITs invest in mortgage-backed securities that pay out interest income. Due to the embedded leverage used, mortgage REITs can often pay out yields that are much higher than the underlying securities they hold.
A possible mortgage REIT to consider here is BXMT, which makes investments in senior loans collateralized by a portfolio of commercial properties. Currently, BXMT’s senior loan portfolio stands at $26.8 billion off a total of 203 loans. The portfolio has a weighted-average loan-to-value ratio of 64%. Currently, BXMT pays a very high dividend yield of 11.6% but hasn’t seen much historical share price appreciation.
Realty Income Corp. (O)
Realty Income is so dedicated to monthly income that it registered the moniker “The Monthly Dividend Company” as a trademark. The REIT is not only a member of the S&P 500, but also belongs to the S&P 500 Dividend Aristocrats index, which only accepts companies that have increased their ordinary dividends for at least 25 consecutive years.
Realty Income meets this criteria soundly, having declared 632 consecutive monthly dividend payouts during more than 50 years of operations, with a total of 119 dividend increases since 1994. To generate this cash flow, the REIT holds a portfolio of 12,200 properties leased to commercial tenants like Walgreens Boots Alliance Inc. (WBA) and Walmart Inc. (WMT). The REIT currently yields 4.7%.
Easterly Government Properties Inc. (DEA)
Investors looking for a more defensive REIT pick can opt for DEA, which currently sports a beta of just 0.6. This is a measure of a stock’s sensitivity and volatility relative to the broad market, which has a beta of one. The lower volatility and sensitivity to market movements of DEA stems from the nature of its tenants, which are all federal government agencies.
DEA’s current tenants unsurprisingly include the U.S. Drug Enforcement Administration, but also the FBI and Internal Revenue Service. Thanks to the stable long-term nature of government employers, DEA’s underlying properties are at low risk of tenant default and enjoy consistent cash flows. Currently, DEA pays a 7.1% dividend yield.
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9 of the Best REITs to Buy Now originally appeared on usnews.com
Update 02/28/23: This story was previously published at an earlier date and has been updated with new information.
