Real estate investment trusts have had a tough couple of years , but opportunities abound—if you know where to look.
Higher interest rates have meant greater costs for the borrowing-dependent industry, while also making REIT dividend yields less attractive compared with bond yields. And this year's banking sector turmoil exposed how reliant some classes of real estate are on financing from regional lenders—which may not be as readily available in the months ahead.
There's lots of storm clouds. The MSCI U.S. REIT index has lost 23% after dividends since the Federal Reserve began lifting interest rates in March 2022, versus a 7% decline for the S&P 500 index.
Breit Sets Limit, Again
REITs, overall, are trading for about 85% of their net asset values, versus a long-term average of 99%, according to Evercore ISI's Steve Sakwa. Relative to projected earnings, REITs appear less cheap: The group goes for a multiple of 18.4 times estimated adjusted funds from operations over the coming year—a key metric for the group—compared with their long-term average of 17.4 times. The sector carries a 4.5% dividend yield, while the 10-year U.S. Treasury note yields 3.8%. That's not quite as good as it sounds—the current premium of 0.66 percentage point is half the 1.33-point historical premium.
REITs aren't a monolithic asset class . Under the surface, there are real differences across the sector—a microcosm of broader market and economic shifts. For office REITs, the postpandemic work environment means that many companies need less space, denting demand—though long-term leases still in place from before 2020 are delaying the full impact. Shopping-center REITs have long been pressured by e-commerce, while warehouse REITs have benefited. Artificial-intelligence enthusiasm has boosted data-center REITs in recent weeks. That has created opportunities—and risks—for investors.
With the annual Nareit conference set for this coming week in New York, here are six REITs to consider, or avoid.
American Tower (AMT)
Major wireless companies like Verizon Communications (VZ) and AT&T (T) couldn't function without the communication towers that cell-tower REITs like American Tower own and operate, essentially acting as landlords for antennas. Profit margins are wide, recurring revenue is high, and future visibility clear, given long-term contracts that often have annual rent increases. The industry is in the midst of an upgrade to 5G networks, which provide faster service but whose signals don't reach as far. More antennas are needed, and that will keep lease growth steady for American, despite potential economic weakness. Meanwhile, the stock trades near its lowest P/AFFO in a decade.
Alexandria Real Estate Equities (ARE)
Alexandria Real Estate Equities owns and operates laboratories and other life-sciences research and development facilities across the country. Unfortunately, this isn't a great time to be owning those things. Biotech companies have been under pressure since the failure of Silicon Valley Bank, and if venture-capital funding slows, it may weigh on demand for lab space. Alexandria shares have dropped 33% since February, and the risk appears to be discounted in the stock, which hasn't been this cheap since the financial crisis. For investors looking for a less risky way to bet on biotech, Alexandria could be the way to go.
Rexford Industrial Realty (REXR)
Americans' collective online shopping habit necessitates billions of square feet of warehouse space to store, process, and transfer all of that stuff. Even concerns about a slowing economy haven't been able to slow the shopping spree, and that meant rent growth of 17% year over year and a near-historically low vacancy rate of 3.6%. Rexford Industrial Realty, which is focused on Southern California, is smaller than warehouse titan Prologis (PLD), but faster growing. Its stock has been hit this year by worries about new warehouse development in its backyard. But demand should more than keep up, supporting rents.
Vici Properties (VICI)
Vici Properties is the owner of a portfolio of casinos and racetrack real estate in Las Vegas and beyond, including Caesars Palace and MGM Grand. Postpandemic Las Vegas is booming, and casino operators continue to expand, increasing property values and boosting their ability to pay rent. Analysts expect AFFO-per-share growth of 10% this year and 5% next year, attractive rates relative to the broader REIT space's 3% to 4% annual earnings growth. "Vici owns some of the most productive assets in the country, with higher visible growth, and a multiple that is more than 15 times cash flow," writes J.P. Morgan's Anthony Paolone.
Digital Realty Trust (DLR)
The artificial-intelligence frenzy has infiltrated the REIT world. Digital Realty Trust, a data-center REIT, is a case in point. The stock had lost half of its value since the start of 2022, but then Nvidia (NVDA) reported results that made AI a must-have for every investor. Digital Realty stock surged 20% in the week following that May 24 announcement. AI will mean more business for the REIT, but it's hard to know when it will translate into actual dollars. Digital Realty also 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 experiencing headwinds in other areas. Approach with caution.
Boston Properties (BXP)
Fewer workers are coming to the office, and that's a problem for Boston Properties, the largest publicly traded U.S. office REIT. It isn't an immediate issue. Some 89% of its square footage was rented out at the end of March, much of it tied up in longer-term leases. But the coming years 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 trades for 9.5 times forward AFFO, versus its five-year average of nearly 22 times. There's no clear positive catalyst to boost shares, however, and a large debt load doesn't help, either.