2023-11-14 09:37:26 ET
Summary
- Interest rates have been a burden on the real estate market, but the end of the rate hike cycle is near.
- The Federal Reserve is expected to keep rates unchanged for the remainder of the year, providing relief for the REIT sector.
- All 4 of these REITs are high-quality in terms of both the strength of their portfolios as well as their management teams.
It is not secret that interest rates have largely been a burden on the real estate market. Not just REITs, but single-family housing as well being impacted as 30-year mortgage rates have surpassed 8%.
However, the end of this rate hike cycle is near, and we could already be done as the Federal Reserve decided to once again keep rates level during the latest Fed meeting. When you look at the CME Fed Watch Tool, it seems as if many believe the Fed will keep rates unchanged for the remainder of the year with only one Fed meeting remaining in mid-December.
When you look at probabilities, which looks at various upcoming Fed meetings going through 2024 as well, odds are likely that the Fed is done hiking rates, which would be a release of pressure for the REIT sector. In fact, rate cuts are projected to start in summer 2024, according to the majority.
When it comes to investing, the markets tend to move before the economy moves, so you want to be ahead. Once rate cuts happen, the market will likely have already made its move.
As such, today we are going to take a look at 4 high-quality REITs trading at cheap valuations. not only are all 4 REITs looking cheap, but all 4 are among my favorite REITs to own period.
4 REITs You Want To Own Before Rate Cuts
REIT #1 - VICI Properties ( VICI )
VICI Properties has been a favorite REIT of mine for a few years now, and is actually my largest REIT holding. The company is unique in the fact that they are the largest landlord on the Las Vegas strip. We will go into some of their assets in a second, but let's first look at the company as a whole.
VICI has a market cap of nearly $30 billion. Over the past 12 months, shares of VICI have fallen over 10%, giving investors a great opportunity to add to this high-quality REIT.
As I mentioned, VICI is the largest landlord on the Las Vegas strip, which likely mean they have some pretty awesome assets in their portfolio. The portfolio contains 54 gaming destinations and 38 non-gaming destinations across North America.
Here is a look at some of those assets, which include the likes of:
- Caesars Palace
- Mandalay Bay
- MGM Grand
- Park MGM
- New York New York
- The Mirage
- The Venetian
The company recently reported their Q3 earnings, which were pretty good. VICI beat on both the top and bottom lines pretty handily with revenues increasing 20% and AFFO increasing 11% on a per share basis. In addition, management increased their full year AFFO guidance as well.
In terms of valuation, analysts are looking for the company to generate AFFO of $2.25 per share in 2024, which equates to a price to AFFO multiple of just 12.4x. For comparable purposes, the stock historically has traded at an average multiple of 16x, suggesting a sizable difference at the moment.
In addition to having an opportunity to purchase the REIT at a cheap valuation, you also get to enjoy a 5.8% dividend, a dividend that has been growing quite fast with an average dividend growth rate of 17.4%.
Analysts are also high on the stock with an average 12-month price target of roughly $35 per share, implying nearly 25% upside from current levels.
REIT #2 - Simon Property Group ( SPG )
Where VICI is my largest REIT position Simon Property Group is one of my longest held REIT positions, which means I have been through the ups and downs with this one. For those of you unfamiliar, SPG is the largest mall landlord with many high-quality malls across North America and the world for that matter.
SPG has a market cap of roughly $45 billion. Over the past 12 months, shares of SPG are flat, meaning the REIT has outperformed the greater REIT industry.
When it comes to malls, they are classified based on retail sales per square foot. This is a good indication of a quality mall because if the tenants are doing well and making sales, then the landlord, SPG in this case, is earning their rent check.
When it comes to SPG, they have an A rated portfolio based on their strong retail sales per square foot across their portfolio. Below is an annual report put out by Korpacz Realty Advisors that updates the sales per square foot data with the proper classification.
SPG recently reported their Q3 earnings in which they tend to update investors on retail sales per square foot for the trailing 12 months. For the past 12 months, the company had retail sales per square foot of $744, which has the company on the cusp of becoming an A+ classification.
So, when we are talking about SPG malls, we are talking about the best of breed, not dead malls that are closing their doors, top quality.
In terms of valuation, analysts are looking for the company to generate AFFO of $11.10 per share in 2024, which equates to a price to AFFO multiple of just 10.2x. For comparable purposes, the stock historically has traded at a five-year average multiple of 13x and a 10-year average of 16.5x.
If you thought the VICI dividend yield was nice, SPG is even higher. SPG currently pays an annual dividend of $7.60 per share which equates to a dividend yield of 6.6%. The REIT did have to cut their dividend during the pandemic but they have quickly grown it in the past few years.
Analysts are also high on the stock with an average 12-month price target of roughly $130 per share, implying nearly 15% upside from current levels.
REIT #3 - Prologis Inc ( PLD )
This REIT is one I am very excited about moving forward as they are best in breed in a sector I am very high on, which is the industrial sector. Prologis is an indirect play on the growth of e-commerce.
PLD has a market cap of nearly $100 billion, making it the largest REIT on our list today. Over the past 12 months, shares of PLD have fallen 5%.
When it comes to Prologis, they are bound to benefit on the growth of e-commerce. Right now e-commerce retail sales account for roughly 25% of retail sales but that number is expected to grow each of the next few years. Higher e-commerce growth can certainly be a tailwind for warehouse and industrial REITs like PLD. E-commerce uses 3x as much logistics space as brick and mortar.
In terms of valuation, analysts are looking for the company to generate AFFO of $4.54 per share in 2024, which equates to a price to AFFO multiple of 22.7x. PLD is known more for higher growth and as they transition this year, you can see the growth packed into the following year of nearly 20%. For comparable purposes, the REIT historically has traded at an average multiple of 27, suggesting a decent sized difference at the moment.
The REIT is cheap, they have some growth potential, but they also pay a nice dividend with some growth packed behind it as well. Very rarely do you find a REIT with strong dividend growth like we see with Prologis. PLD currently pays a dividend that yields 3.3%, but in addition to that they also have a five-year dividend growth rate of 12.6%. The REIT has grown the dividend for nearly a decade now.
Analysts are also high on the stock with an average 12-month price target of roughly $133 per share, implying nearly 30% upside from current levels.
REIT #4 - Realty Income Corporation ( O )
Realty Income is last but certainly not least. The REIT is among the most well-known REITs on the market, known very well for their monthly dividend, after all they coined themselves "The Monthly Dividend Company."
Realty income has a market cap of $37 billion. Over the past 12 months, shares of O have been under pressure with the REIT falling more than 20%.
Realty Income has a portfolio of more than 13,100 properties, a number that is expected to increase once they close their recent acquisition of Spirit Realty ( SRC ).
The REIT is a retail REIT first and foremost, but they have been growing their gaming portfolio as well over the years, making an investment in the Bellagio, which further speaks to the strength in the first REIT we covered VICI Properties.
Realty Income has a great management team and a stellar track record, but some of their top tenants have come under question of late, which are Dollar General ( DG ), Dollar Tree ( DLTR ) and Walgreens ( WBA ), stocks that are all down huge in 2023. In addition, the exposure to investment grade tenants will be dipping below 40% once the SRC acquisition closes.
However, I have all the confidence in the world that management will get thing figured out and I will take this time with valuation low to continue to grow my position. I have added on multiple occasion the past few months, so I am not buying hands over fist as I have quite a full position, but for those of you on the outside, now looks like a great valuation to at least nibble.
In terms of valuation, analysts are looking for the company to generate AFFO of $4.15 per share in 2024, which equates to a price to AFFO multiple of just 12.0x. For comparable purposes, the stock historically has traded at an average multiple of 19x, suggesting a sizable difference at the moment.
Realty Income is one of only three REITs on the dividend aristocrats list as they have increased their dividend for more than 25 consecutive years. The dividend yield is the highest it has been in decades, sitting at 6.1%, growing every quarter.
Analysts are also high on the stock with an average 12-month price target of roughly $60 per share, implying nearly 20% upside from current levels.
Investor Takeaway
All four of these REITs are fantastic companies with great portfolios and they are leaders in their respective industries. Finding high-quality companies at cheap prices is how long-term wealth is built. There are opportunities every once in a while in these companies and now looks like that time.
Rates have been a thorn in the side for many REITs over the past 18 months, but with the cycle coming to an end very soon, I want to be ahead of the game rather than chasing the REITs higher.
In the comment section below, let me know your thoughts of these 4 REITs that we covered today.
Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.
For further details see:
4 REITs To Buy Before Rates Get Cut