The Speech I Was Going to Give

Well, I gotta say…

This week is going a little differently than I imagined.

My plan was to be in Las Vegas right now, where I’d been invited to speak at the annual MoneyShow convention. But, without getting into detail, I had to cancel my trip at the last minute.

So here I am, still in South Carolina, away from the glitz, glamor, and gambling of Sin City. Which, I must be honest, is okay with me this time.

If it wasn’t meant to be, it wasn’t meant to be.

But addressing my Wide Moat Daily audience? That is meant to happen.

So, since I still have the presentation I prepared, how about I just share it with you all instead?

The Case for REITs

My regular readers know I expect real estate investment trusts, or REITs, to start doing well sometime soon due to a few factors. For one thing, my team and I still see the Federal Reserve cutting benchmark interest rates twice this year.

Starting in September.

We all learned yesterday that it’s holding them steady for now. But, to quote Jerome Powell from his press conference, “We think the time is approaching” to loosen restrictions.

Apparently, the “overwhelming” opinion among his colleagues is they could cut by the next meeting. Which, for the record, is being held September 17-18.

That would help REITs’ public perception immensely.

The common belief is that these companies can’t possibly make money when interest rates are elevated. It’s such a stubborn notion, in fact, that the entire sector has suffered ever since the Fed began attacking inflation in 2022.

It doesn’t matter how much I point out that so many REITs are still growing their businesses while maintaining stellar balance sheets. Interest rates are up, so REIT shares must be brought down.

On the plus side, that means the reverse should be every bit as true. When interest rates go down, REIT shares should soar.

I also expect the economy to improve next year. If November’s elections go the way I think they will, we could easily see such things as:

Regulations removed
Taxes cut
Business optimism rise

All of which would add to a positive outlook for undervalued REITs.

I’m confident in both expectations. But as I wrote on Tuesday, you always want to have a Plan B.

This means I do have to stress that I don’t have a crystal ball, so I could be wrong. (I don’t think I am, but I could be.) And if I am wrong, REIT share prices could continue to lag a while longer.

However, if you’re with me and have a lot of hope for the future, there are some sectors I’m especially interested in right now.

The REIT Sectors I’m Really Watching

REITs are an incredibly diverse category, ranging from hotels to office buildings, billboards, and retailers like malls and shopping centers.

There can also be incredible diversity within each sector depending on where specific companies operate, who manages them, what clients they target, and when they began. So just because I don’t mention a category doesn’t mean I think it’s unsalvageable.

It’s only that, as a category, I’m not as excited about its larger prospects as I am on others. For instance…

Data Centers: The technology trade is so much bigger than the Magnificent Seven. It’s a shame so many people haven’t realized that up ‘til now. But their loss can be your gain when you consider data centers. While their “little tech” cousins – tower REITs – still lack investor demand with muted growth expectations for the year, data center growth continues to accelerate thanks to artificial intelligence (AI).

We still like American Tower (AMT) in particular. It’s the largest cell tower REIT with a lot more expansion power to exert. AMT is expected to grow earnings by 6% this year, and we expect it to look strong in 2025 as well.

Industrial: During the shutdowns, everyone understood that warehouses were being built up everywhere. But then news of overbuilding began creeping into the investment picture, and sentiment became more cautious. That’s not a bad state of mind, for the record… just as long as it doesn’t prevent you from noticing opportunities that do arise.

For instance, leasing activity is actually improving for REITs like Prologis (PLD). It’s forecasting growth of 8% this year. And Rexford (REXR), another of our strong-buy picks, recently reported funds from operations (FFO) per share that was up 11% quarter over quarter.

Net-Lease: Net-lease REITs are so named because of the triple-net contracts they operate with. Not only do tenants pay rent, they also pay property taxes, utilities, and maintenance costs. This setup tends to work for national chains like McDonald’s (MCD) and Advance Auto Parts (AAP) that like the autonomy involved along with lower rent expectations.

As for the REITs themselves, they tend to receive exceptionally predictable income. Therefore, they’re more capable of providing exceptionally predictable dividends. My team and I especially like Realty Income (O), Agree Realty (ADC), and Essential Properties (EPRT) in this category… though we do remain cautious about certain tenants such as Walgreens and Red Lobster, both of which have raised concerns about the health of their lease contracts.

Residential: This is a pretty big category that offers plenty of choices – some of which have soured since the Covid-19 shutdowns came their way. Big-city apartment REITs in places like San Francisco, San Diego, New York, and Boston, for instance, aren’t quite the talk of the town like they used to be.

Thanks to massive population shifts over the past few years, we now prefer Sunbelt landlords like Mid-America (MAA) and Camden Properties (CPT). Manufactured housing REIT Sun Communities (SUI) also has clear appeal, as it offers entire houses for families to rent without any mortgage obligations.

Healthcare: These REITs seemed down and out for a while thanks to people’s fear of catching Covid. But they’re making a comeback overall, especially with the aging population accelerating the need for senior housing and senior care.

That’s why we prefer healthcare positions that emphasize the Baby Boomer generation, such as Ventas (VTR), and skilled nursing REITs like Omega Healthcare (OHI).

These companies should do well even if the path forward remains a bit bumpy. They’re all in strong positions to grow their portfolios, their income, and their dividends regardless.

But if everything comes together like they seem to be? Those strong positions will finally garner the respect they deserve.