It’s been an unexpectedly difficult year for the real estate investment trust (REIT) sector.
REITs have historically outperformed the stock market over long stretches of the past 50 years. However, most of that outperformance came during a period of persistently declining interest rates.
This makes sense as REITs tend to carry a lot of debt on their balance sheets to fund their property holdings. Thus, lower interest rates cause their interest burden to decline while simultaneously increasing the value of their properties thanks to improving cap rates.
Unfortunately, this favorable math has gone into reverse over the past two years as interest rates have soared. Interest expenses are rising while the value of many classes of commercial real estate is slumping.
The good news is that interest rates may be topping out. Additionally, the Federal Reserve may be looking to cut interest rates later this year. Here are seven REITs to buy now which will benefit from these developments.
Public Storage (PSA)
Public Storage (NYSE:PSA) is the largest self-storage REIT in the United States. In business for decades, the firm has produced exemplary long-term returns for its shareholders.
Public Storage was the first prominent national-scale self-storage company. It built a strong brand, and this positioning made it easier for Public Storage to acquire other self-storage sites from smaller operators.
Public Storage has been a shrewd capital allocator creating other successful ventures such as its business parks operation along with a real estate arm that transforms self-storage properties into higher value uses when appropriate.
PSA stock has fallen nearly a third from its highs, almost entirely driven by interest rates. The core business is as sound as ever and shares should rebound toward their all-time highs once the Fed begins to cut interest rates.
AvalonBay Communities (AVB)
AvalonBay Communities (NYSE:AVB) is a multifamily housing REIT. It owns more than 90,000 individual apartment units spread across dozens of communities in primarily tier one American cities. It has significant exposure in markets such as Boston, New York and Washington D.C.
Apartments have been an interesting market because they benefit from the rising housing market. In general, as house prices go up, it makes it more expensive for buyers to finance a house. Therefore, more people may decide to rent instead of own. This expands the market for AvalonBay and allows it to raise rents more frequently; for example, the company raised rents 6% on average in 2023.
The pandemic increased rents considerably as tenants were willing to pay more for housing given that they were spending more of their time at home versus the office.
Combined with rising housing prices, it’s become prohibitively expensive for many younger people to own a property. That’s a strong tailwind for the apartment sector apartment, including AvalonBay.
AVB stock sold off due to interest rate concerns, however, that seems partially misguided as those higher interest rates will limit homebuying and thus maintain elevated demand for apartments.
AvalonBay has historically generated market-beating returns. Investors can benefit from the current and temporary underperformance in the stock price with this favorable entry point.
Realty Income (O)
Realty Income (NYSE:O) is one of America’s largest triple-net least REITs. Triple net lease is a type of real estate contract where the tenant rather than the landlord is responsible for crucial costs including maintenance, taxes, and insurance.
Given the highly inflationary environment of the past few years, this built-in inflation protection has been exceedingly valuable for triple net lease landlords such as Realty Income. In addition to its built-in inflation protection, Realty Income has proven to be a smart capital allocator. For one thing, the company wisely divested its office properties several years ago before the bottom fell out of that market.
Realty Income’s tenant base today is primarily mission-critical retail, industrial and logistics properties. These tenants have proven through past economic cycles to be resilient during downturns.
Like just about everything in the REIT space, Realty Income has dramatically underperformed the stock market due to macroeconomic concerns in recent times.
However, the company’s triple-net model, strong tenant base, and unique monthly dividend payout structure should keep the company financially stable. The firm’s monthly dividend policy also maintains a loyal shareholder base, while the 5.8% dividend yield makes it a great option for income investors.
National Storage Affiliates (NSA)
National Storage Affiliates (NYSE:NSA) is a smaller and newer self-storage operator. The company, in its present form, was founded around a decade ago to take advantage of opportunities to build and consolidate self-storage units in fast-growing markets within America’s top 100 largest metropolitan areas. It operates 1,050 properties as of year-end 2023.
The firm had tremendous success right out of the gate. It has quadrupled revenues just since 2016. That’s a pretty incredible feat in the normally slower-moving REIT space.
As National Storage Affiliates is substantially smaller than Public Storage, and does not have as much of a fortress balance sheet as its larger peer, NSA stock has been more sensitive to the current downtown in the sector.
Shares have plunged nearly 50 percent from their peak. This seems overblown given that the business remains strong. With the stock down at today’s levels, NSA shares yield a generous 6.3% dividend yield.
Corporacion Inmobiliaria Vesta (VTMX)
Corporacion Inmobiliaria Vesta (NYSE:VTMX) is a newly listed REIT that just went public in mid-2023; it focuses on Mexican industrial properties.
It is the first Mexican REIT to offer its shares directly on a major U.S. stock exchange. And it is a well-timed entry as Mexican industrial properties should be a burgeoning market. That’s because Mexico is enjoying a profound manufacturing and logistics boom that shows no signs of slowing down.
Specifically, Mexico is taking advantage of what’s known as the reshoring phenomenon. Thanks to mounting skepticism about the Chinese economy and political situation, North American firms are increasingly moving their supply chains and logistics closer to home.
Mexico’s more affordable labor available at close proximity to the United States makes it a natural trading partner. Indeed, Mexico overtook China to become the United States’ top trade counterpart in 2023.
Vesta owns tons of industrial property in Mexico. It should enjoy sharply rising rental rates per square foot as the reshoring boom continues to play out. Finally, as the only Mexican industrial REIT listed in the United States so far, it should have a considerable first mover advantage.
Prologis (PLD)
Prologis (NYSE:PLD) is the largest REIT listed in the United States as measured by market capitalization. Until recently, it was also the only REIT with a market cap over $100 billion, though it has slipped just below that level with the recent sell-off.
Prologis has built a business empire atop its industrial properties. Its warehouses and logistics centers have been integral for the rise of North American e-commerce solutions.
The company has approximately 1.2 billion square feet of properties under control today. Additionally, it controls a massive land bank which will give it a pipeline for new property development for many years to come. Diversifying its revenues, Prologis also operates a third-party strategic investment platform that manages $60 billion of capital for others, collecting fees along the way.
PLD stock plummeted over the past month following a weak earnings report and concerns about higher interest rates potentially hitting industrial real estate. The abrupt drop in PLD stock has pushed this industry-leading REIT’s dividend yield up to almost 4%.
Rayonier (RYN)
Rayonier (NYSE:RYN) is a leading forestry-focused REIT. It owns timberland properties across 10 U.S. states spanning the South and Pacific Northwest regions. It also has a sizable forestry operation in New Zealand.
Timberland is a unique asset class. Because trees grow so slowly, a plot of Rayonier’s land matures over decades. Unlike traditional agriculture which is exposed to near-term boom/bust cycles in crops like soy or corn, a timber owner can time its harvests with more precision to benefit from broader prevailing economic conditions.
Timberland owners have two other ways to profit. They can sell off plots of land that come into the path of urban development, potentially earning a large profit if that land turns into housing, retail, or other higher uses. Finally, timber land can be rented out for hunting, camping, and other such recreational activities.
Rayonier shares have produced solid long-term returns, but shares have been roughly flat over the past five years. This more recent underperformance marks a solid entry point. With inflation mounting, both land and timber prices should climb, taking RYN stock higher with them.
On the date of publication, Ian Bezek held a long position in NSA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.