Navigate
X

REITs Are Taking a Beating, But Some Names Present a Profit Opportunity

REITs are among the most hated stocks in the market right now.

As regular readers will know, REIT stands for real estate investment trust.

These are special kinds of stocks that own income-producing real estate and are obliged by law to pay out at least 90% of the rent they collect to shareholders.

And here at Wide Moat Research, they’re one of our favorite ways to collect rising streams of stock market income. But this year, despite the rally on Wall Street, investors have soured on them.

The market is up 18.16%. Meanwhile, REITs are barely up 0.46% as of writing this.

You can see that in the chart below…

The Schwab Vanguard Real Estate Index Fund ETF (VNQ) owns a basket of 165 REITs and real estate-related stocks, making it a great way to track the REIT sector.

As you can see, VNQ is only up by 0.46% since the start of the year.

And over the last year, it’s down by more than 15%.

And that’s no surprise…

According to the folks in the mainstream financial press, REITs are terrible investments right now… Here’s just a small sample of some of the negative headlines in the press about them…

  • Morningstar: “REITs Are Getting Caught Up in the Wave of Banking Fear”

  • Wealth Management: “REIT Struggles Weigh on Real Estate ETFs”

  • Fitch Ratings: “U.S. REIT Sector Outlook Lowered to Deteriorating Amid Tighter Lending”

But the mainstream narrative is wrong when it comes to the REIT asset class as a whole.

All REITs are not created equal.

Just like stocks, there are some higher quality REITs than others.

And I’m not interested in buying the entire sector at large, but instead, picking the best of the best at a bargain price.

That’s how I sleep well at night: buying blue chips.

And right now, there are wonderful opportunities for investors to take advantage of in the REIT sector.

Today, I will highlight one of those opportunities and show you that this is one of the best times in history to be a buyer of one of our favorite REITs…

My Favorite REIT

Despite most of what you hear from the mainstream media, there are some high-quality blue-chip REITs that are doing just fine.

Not only are they chugging along, paying out profits like they’re supposed to… But they’re also selling at bargain basement prices.

That means yields are the highest they’ve been in a decade.

And one REIT stands out among all the others right now – Realty Income (O).

Realty Income is a REIT that specializes in net leases. Those are rental contracts where the tenant is responsible for paying for property taxes, insurance, and maintenance – in addition to rent and utilities.

It is also known as the “monthly dividend company.” And it’s so serious about that payout schedule, it’s trademarked that name.

As it’s shown over the past 30 years, nothing’s getting in the way of that monthly check.

In fact, in July, Realty Income declared its 637th consecutive monthly dividend payment.

You read that right. And streaks like this don’t happen by accident.

Realty Income has been growing its top and bottom lines for decades.

And regardless of all the negative headlines, here are some highlights from Realty Income’s recent Q2 business earnings report:

  • Realty Income’s sales topped $1 billion (up 25.9% year over year)

  • Realty Income raised its full-year real estate acquisition guidance by $1 billion (from $6 billion to $7 billion)

  • Realty Income increased its full-year adjusted funds-from-operations (AFFO) guidance by $0.02/share

  • Realty Income increased same-store rent by 2%, leading to 3.1% year over year AFFO growth

Even with the 2% rent increase, Realty Income maintained an occupancy rate of 99%.

And if you’re wondering, AFFO is the metric that investors should use to track a REIT’s profitability.

It’s akin to earnings-per-share, or EPS, which is commonly used to evaluate stocks. And takes into account unique costs that REITs incur.

So when you’re looking at a REIT, the EPS is not nearly as important as the AFFO.

And as you saw above, Realty Income increased its AFFO guidance this year and saw 3.1% AFFO growth year over year despite the negative headlines.

Priced for a Profit

But despite all of this reliable performance, Realty Income shares fell by 3.3% last week.

On a year-to-date basis, Realty Income shares are now down by more than 7%.

This sell-off has pushed Realty Income’s dividend yield up to 5.2%… well above its 5-year average yield of 4.19%.

The market isn’t acting rationally here.

Realty Income’s management is still generating growth in the face of fearful headlines, and yet, they’re not getting any credit for it.

The stock’s recent sell-off has pushed its price-to-AFFO multiple down… To levels we’ve only seen once during the last 15 years (during the COVID-19 crash in March of 2020).

The price-to-AFFO is similar to the price-to-earnings multiple that investors commonly use for non-REIT stocks.

The last time Realty Income was this cheap, shares rallied by 54% over the next 18 months.

Now of course the past doesn’t always predict the future, but looking at this company’s underlying fundamentals, its present-day valuation, and its future growth prospects – I believe shares are primed to produce double digit returns moving forward as well.

And this is just one such opportunity to pick up shares of a blue-chip REIT at a bargain deal price.

Subscribers to my Intelligent Income Investor service gain access to our entire REIT portfolio, which includes many strong buy opportunities right now.

In fact, there is another bargain deal REIT that I share in this service that is so spectacular, I recently published a special presentation on it called “Amazon’s Secret Royalty Program.”

In it, I share how regular Americans are collecting huge payouts from America’s biggest companies (like Amazon)… Click here to watch.

Don’t let the negative headlines keep you from missing out on this opportunity.

Happy SWAN (sleep well at night) investing,

Brad Thomas
Editor, Intelligent Income Daily