EQIX - Top 12 REITs For The Next 12 Months

2024-01-02 08:00:00 ET

Summary

• REITs are performing well and expected to continue to rise, with potential for a 45% increase in the next 2-3 years.
• If the Fed reduces the prime rate, REIT yields will become more competitive with bonds and treasuries.
• REIT balance sheets are in good condition, with low debt ratios and valuations coming back into the low end of their normal range.
• This article presents the best 12 REITs to buy for 2024, and the author's rationale.

The Opportunity

REITs are hot at the moment. From its $70.61 low on October 30, the Vanguard Real Estate ETF (VNQ) is up 26% in just under two months, standing at $88.79 as of this writing. Based on the technicals, I believe VNQ will reach $129.00, probably within the next 2 - 3 years, which would be a further 45% run-up.

If the Fed follows through on its stated intention to begin reducing the prime rate next year, all risk assets will benefit, and REIT yields will become more competitive with bonds and treasuries, especially if inflation remains under the average REIT dividend.

REIT balance sheets are in very good condition, despite the two-year selloff, reflecting solid operating performance in most sectors (Office REITs being the main exception). The average REIT debt ratio is just 30%, and the average Debt/EBITDA is a sturdy 6.3. Valuations are coming back into the low end of their normal range, with an average FFO multiple of 18.0x. The average YAP (Yield At Purchase) has fallen to 3.64%, which is slightly lower than normal, and may portend broad dividend increases.

Criteria

In choosing the best REITs to invest in now, the company should maintain a strong balance sheet, with positive FFO growth projected for next year, and offer one of the following:

• High, safe dividend yield ,
• High, safe dividend growth (preferably double-digit), and/or
• High FFO growth (at least 7%, preferably double-digit),

all while selling for a reasonable price.

Let's begin by looking at the leading candidates on each of the above criteria.

Cash COWs (High, Safe Yield)

The following REITs offer yields of 5.00% or better, with Dividend Safety of B- or better, according to Seeking Alpha Quant Ratings.

Source: Hoya Capital Income Builder and Seeking Alpha Premium

* Dividend Score projects the Yield 3 years from now on shares bought today, assuming the dividend growth rate remains unchanged.

DEI is eliminated from consideration, because of its shrinking revenues and dividends, and its troubled balance sheet. KRC goes to the bubble, because of its weak FFO forecast. APLE would go to the bubble because of its dividend shrinkage, if not for the fact that it is paying a special dividend this month, more than half the size of its regular monthly divvy. Last year in December, APLE paid investors double its usual monthly dividend. Who knows? Maybe it will become a Christmas tradition.

The two Cannabis REITs are the clear front-runners in this heat, with CUZ and APLE a distant third and fourth. However, NLCP is very small and volatile. If you want to take a taste, it would be wise to keep your allocation small and be very patient.

Next, we look at Cash COW's 7 through 11:

Source: Seeking Alpha Premium and Hoya Capital Income Builder

Let's see how the top 5 divvy growers shape up on FFO growth, balance sheet, and valuation.

Source: Hoya Capital Income Builder and Seeking Alpha Premium

PK is eliminated from the running because of its significant balance sheet issues. Shares are very cheap, and the Yield is rated A- for Safety, but the company will not fare well if there is an unexpected downturn.

EQIX is extremely strong, and its price reflects that fact. If you are OK with a YAP around 2.00, this company is a good choice for share price outperformance or long-term buy-and-hold.

PLD is a great company, but when you are buying for dividend growth or share price outperformance, a step back in FFO is a serious red flag. So although PLD is a strong Hold, and will probably do well this year, it doesn't make our best-of-the-best list this year.

HST has no serious weaknesses. However, with its very slow FFO growth, it is not likely to keep up the pace of dividend growth. Still, the YAP is about 40 bps (basis points) above average at 4.07%, and rated A+ for Safety, and there is always demand for a company like that, particularly when shares are so cheap.

Like EQIX, EGP is very strong, and its price reflects its money-making ability. In Monopoly terms, EQIX is like buying Boardwalk. EGP is like buying North Carolina Avenue.

Thus, among the World Beaters, we have 7 more strong candidates:

1. IIPR
2. AMH
3. REXR
4. INVH
5. EQIX
6. HST
7. EGP

IIPR is on both lists, so we have a total of 12 -- an even dozen!

Investors' Bottom Line

2024 is likely to be a good year for REITs . Most REITs will probably post handsome gains in the coming 12 months, but not all REITs will flourish equally.

In all likelihood, there are some on this list that will underperform, and some I have not included in the list that will outperform. However, these are the 12 surest bets, to my way of thinking. Invest in the COWs for high, safe Yield, and the World Beaters for share price gain outperformance.

Source: Hoya Capital Income Builder and author calculations

Note: just because a REIT appears on this list doesn't necessarily mean I am advocating buying it. In fact, there is a company listed above that I would not invest in, under any circumstances.

As always, however, the opinion that matters most is yours. Because it's your money.

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