Recovering from the bottom, some REITs are headed for revitalization.
When the Federal Reserve began its interest rate hiking cycle in March 2022, the real estate investment trust (REIT) sector dived. Between 1972 and 2022, US-based REITs delivered a respectable average annual return of 11.26%. As such, REITs are often picked for steady passive income.
This completely inverted with the hiking cycle, as the S&P Global REIT index yielded a -1.49% three-year annualized return. Year-to-date, this sector is barely above water, at +0.24% return. Industrial and retail REITs make up the bulk of the sector, at 18.7% and 18.4%.
Multi-family residential REITs hold 9.3%, while diversified, data center, health care, and office REITs are all within the 8% weight range. Due to the remote work trend, leftover from the lockdown period, office and infrastructure performed the worst, while small-cap REITs outperformed at +8.59% returns in June 2023.
That month, Fitch downgraded the REIT sector from “neutral” to “deteriorating.” Nonetheless, REITs have been a popular investment vehicle due to the 90% rule. Because these trusts are obligated to distribute 90% of taxable income to shareholders as dividends, they are exempt from corporate income taxes.
Moreover, REIT dividends have ordinary income status with a maximum capital gains tax of 20% (added to 3.8% Medicare surtax). Taking all these factors into account, in addition to expected rate cuts in 2024, which REIT stocks are sensible for investors right now?
All three show signs of recovery over the month: O (+5.7%), PLD (13.6%) and AMT (+10.6%).
1. Realty Income Corp
This REIT mainly focuses on retail and net-leased commercial real estate. The net-leasing model is attractive for investors because all operating costs (tax, insurance, maintenance) go to tenants. This is why Realty Income (NYSE:O) has had a consistently high dividend payout history, presently at a 5.62% annualized return.
Moreover, the trust has a history of high portfolio occupancy, rarely under 95%. As of the September 30th report, Realty Income holds over 13,250 properties with a 98.8% occupancy. Although the trust is mainly US-based, it also has properties in Spain, Italy, Ireland, and the UK for diversification across 85 sectors.
Realty Income has a higher price-to-earnings ratio of 41.16 compared to the REIT average of ~20 P/E. This indicates that investors are willing to pay a premium for a high dividend yield annually at $3.072 per O share.
Based on 18 analyst inputs pulled by Nasdaq, O stock is a “buy.” The average O price target is $57.83 vs the current $53.92. The high estimate is $67.5, while the low forecast is $48 per share.
2. Prologis, Inc.
Focusing on the industrial and logistics sector, Prologis (NYSE:PLD) delivers an annual dividend of $3.48 per PLD share (2.93%). A lower price-to-earnings ratio of 36.67 P/E makes Prologis even more enticing.
For the tumultuous fiscal year 2022, Prologis reported 98% average occupancy with 82.4% retention. The important core Funds From Operations (FFO) cash flow metric showed improvement in 2022 compared to 2021, at $5.16 vs $4.15 per diluted share respectively.
For the full year 2023, Prologis’ guidance for core FFO is between $5.58 and $5.60 per share, as of the latest boosted update in October.
Based on 24 analyst inputs pulled by Nasdaq, PLD stock is a “strong buy”. The average PLD price target is $131.76 vs the current $118.85. The high estimate is $154, while the low forecast is above the present price at $119.
3. American Tower Corp
Like recently boosted Crown Castle (NYSE:CCI), American Tower heavily invested in wireless communications infrastructure. Following a similar revenue model, American Tower Corp (NYSE:AMT) generates revenue from cell tower leasing to wireless carriers and acquisitions, maintenance, and engineering services.
Compared to March 2021, AMT cut in half its debt-to-equity ratio, from 6.45 to 3.16 as of this September. Of the three REITs listed here, AMT offers the highest annual dividend payout at $6.48 per share (3.08%), given that its stock is priced much higher.
As of the November Q3 earnings report, American Tower reported a 5.5% revenue uptick to $2.8 billion. 2022 the REIT reported double-digit funds from operations (FFO) at 11.1% ($5.27 billion). For the latest Q3 quarter, FFO growth was at 5%.
AMT’s high P/E ratio of 137.73 is due to its sector, from which investors expect high 5G network growth.
“As the 5G investment cycle continues and data consumption growth persists, we remain focused on driving attractive organic growth rates across our existing portfolio.”
Based on 19 analyst inputs pulled by Nasdaq, AMT stock is a “strong buy.” The average AMT price target is $214.5 vs the current $205.45. The high estimate is $259, while the low forecast is $169 per share.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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