Real estate mutual funds have had a rough few years, but opportunities abound — if you know where to look.
Higher interest rates have resulted in higher costs for the credit-dependent industry, while also making REIT dividend yields less attractive compared to bond yields. And this year's banking turmoil has highlighted just how dependent some property classes are on financing from regional lenders – which may not be as readily available in the coming months.
There are many storm clouds. The
MSCI US REIT Index
is down 23% after dividend payments since the Federal Reserve began raising rates in March 2022, versus a 7% decline
S&P 500 index.
According to Evercore ISI's Steve Sakwa, overall REITs trade for about 85% of their net asset value, compared to a long-term average of 99%. Relative to projected earnings, REITs appear less cheap: the group is targeting multiples of 18.4x estimated adjusted working capital for the coming year — a key metric for the group — compared to its long-term average of 17.4 . The sector has a dividend yield of 4.5%, while the US 10-year Treasury yield is 3.8%. That's not quite as good as it sounds — the current premium of 0.66 percentage points is half the historical premium of 1.33 points.
REITs are not a monolithic asset class. Under the surface, there are real differences within the industry – a microcosm of broader market and economic changes. For office REITs, the post-pandemic work environment means many companies need less space, which is dampening demand — though long-term leases dating back to before 2020 are delaying the full impact. Mall REITs have long been under pressure from e-commerce, while warehouse REITs have benefited. Enthusiasm for artificial intelligence has given a boost to data center REITs in recent weeks. This has created opportunities – and risks – for investors.
With the annual Nareit conference taking place in New York next week, here are six REITs to consider or avoid.
Big cell phone companies like
(T) couldn't function without the communications towers that own and operate cellular REITs like American Tower, which essentially act as antenna lessors. Profit margins are high, recurring revenue is high, and the outlook for the future is clear, as long-term contracts often come with annual rent increases. The industry is in the midst of transitioning to 5G networks, which offer faster services but signals don't reach as far. More antennas are needed and that will keep rental growth steady for American despite possible economic weakness. The stock is now trading near its lowest P/E ratio in a decade.
Alexandria Real Estate Equities owns and operates laboratories and other life sciences research and development facilities nationwide. Unfortunately, this is not a good time to own these things. Biotech companies have been under pressure since the failure of Silicon Valley Bank, and if venture capital funding dwindles, it could weigh on demand for lab space. Shares in Alexandria are down 33% since February, and the risk seems priced into the stock, which hasn't been the cheapest since the financial crisis. For investors looking for a less risky way to invest in biotechnology, Alexandria could be the right choice.
Americans' collective online shopping habit requires billions of square feet of warehouse space to store, process, and transport all of these things. Even worries about a slowing economy couldn't halt the shopping spree, and that resulted in rental growth of 17% year-on-year and a near-historically low vacancy rate of 3.6%. Rexford Industrial Realty, which focuses on Southern California, is smaller than the storage giant
(PLD), but faster growing. The company's shares have been hurt this year by worries about the development of a new warehouse in its backyard. But demand should more than sustain and support rents.
Vici Properties owns a portfolio of casino and racetrack properties in Las Vegas and beyond, including Caesars Palace and MGM Grand. Post-pandemic Las Vegas is booming and casino operators continue to expand, increasing real estate values and increasing their ability to pay rent. Analysts expect AFFO per share growth of 10% this year and 5% next year, attractive yields compared to the broader REIT space with annual earnings growth of 3% to 4%. “Vici owns some of the most productive assets in the country with higher visible growth and a multiple of more than 15 times cash flow,” he writes
The madness of artificial intelligence has infiltrated the REIT world. A case in point is Digital Realty Trust, a data center REIT. The stock had lost half its value since early 2022, but then
(NVDA) reported findings that made AI a must for every investor. Digital Realty's stock rose 20% in the week following the May 24 announcement. AI will mean more business for the REIT, but it's hard to say when that will translate into actual dollars. Digital Realty, too, remains heavily indebted — 7.1 times net debt to adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda at the end of March — and is facing headwinds elsewhere. Proceed carefully.
Fewer and fewer workers are coming into offices, and that's a problem for Boston Properties, the largest publicly traded US office REIT. It is not an immediate problem. Around 89% of the space was let at the end of March, a large part of which was tied to long-term leases. But the years ahead will still be challenging, with 18% of leased space expiring by 2025. The stock is down 55% over the past year, so much of the bad news is priced in: Boston Properties is trading at 9.5 times forward AFFO against its five-year moving average of nearly 22 times. However, there's no clear positive catalyst for stocks to rise, and a large debt load isn't helping either.
write to Nicholas Jasinski at [email protected]