As I mentioned yesterday, I spent last week attending REITweek, the largest real estate investment trust event of the year.

And I have to say, I’m cautiously optimistic about commercial real estate.

The sector has been under intense pressure ever since the shutdowns hit in 2020. Our entire concept of CRE was flipped on its head as everyone avoided offices… malls… hotels… most shopping center operators…

And the list went on.

So did the stressors.

Many landlords never really recuperated from the rent they lost out on. Others, particularly office owners, continue to suffer from altered tenant expectations (we discussed that here).

And while publicly traded CRE, as a category, seemed to shrug off much of that negativity in 2021 and 2022, inflation and the artificial intelligence (AI) boom reversed that mentality. Investors have largely neglected anything “boring” (i.e., value-oriented), with only the last few months showing some signs of progress.

That hasn’t changed my opinion, for the record. I don’t invest based on popularity contests. I look for much more sustainable trends with undervalued entry points. And if you’re reading this, I assume you do too.

In which case, the last two years have been filled with plenty of opportunity.

Of course, even the most patient value investors want to see their share prices rise eventually. So, REITweek was a welcome experience.

Although I walked away still seeing challenges related to inflation and high interest rates, I’m also encouraged by three key themes from REITweek.

Here’s what I heard…

Key Theme No. 1: Acquisition Volumes and Earnings Guidance Are Increasing

Short-term share prices say very little about a company’s value, real estate investment trust (REIT), or otherwise. But do you know what does say a lot?

How much one is growing in the moment and expecting to grow going forward. That’s why I was very happy to hear that:

• Realty Income (O) raised its expected investment volume from $2 billion to $3 billion. And it upped its per-share 2024 funds from operations, or FFO (the REIT equivalent of earnings per share), from $4.13-$4.21 to $4.15-$4.21. CEO Sumit Roy says, “These increases stem from an improving investment environment, particularly in Europe.”

• Industrial REIT Terreno (TRNO) is taking advantage of a $750 million deal pipeline. It recently closed on a $365 million portfolio of properties located in New York City, Northern New Jersey, San Francisco Bay Area, and Los Angeles. And it’s still on the prowl for more deals.

• Healthcare REIT Welltower (WELL) raised its 2024 earnings guidance from $4.02-$4.15 to $4.05-$4.17 per share. And competitor Ventas (VTR) raised its yearly midpoint FFO guidance to $3.14, up from $3.125. Both are looking to grow by taking advantage of distressed prices elsewhere in the sector.

• On the skilled nursing front, both Omega Healthcare Investors (OHI) and Sabra Healthcare (SBRA) noted a growing acquisition pipeline with few signs of incremental tenant stress. That’s very big news for a sector that’s been struggling ever since the shutdowns.

• Life-science REIT Alexandria Real Estate (ARE) increased its dividend 2.4% from $1.27 per share to $1.30 per share.

These are all indications of healthy positions and positionings that I cannot ignore.

When companies report numbers like those, they’re much more likely to see share price increases as well.

And sooner rather than later.

Key Theme No. 2: Strong Leasing in Retail

Many landlords at REITweek cited strong leasing demand and improved pricing power. And since that’s how they make their money, that’s a big deal.

The net absorption rate – the total amount of space being actively leased minus any space vacated – hit its lowest level since the pandemic. This is partially because there isn’t nearly as much new supply coming to market these days thanks to inflationary costs.

In fact, construction starts are at their weakest levels since at least 2007.

This trend is showing especially in retail, which has seen some surprising surges since the economy reopened. The “death of retail,” it turns out, was greatly exaggerated, and some associated CEOs are celebrating.

Jackson Hsieh, for instance, CEO of Macerich (MAC) – a mall REIT – was excited to discuss the company’s new “path forward” strategy. It plans to focus on 30 core assets while potentially unloading a portfolio of around $500 million worth of free-standing properties.

Over in the shopping center arena, Kimco (KIM) raised its FFO per share from $1.54-$1.58 to $1.56-$1.60 at the end of the first quarter. And while it’s proving to be the one to beat these days, I expect good news from many of its competitors as well as this year continues.

As I’ve shared many times before, the “death” of brick-and-mortar retail has been greatly exaggerated. This market is simply finding its equilibrium. And everything I saw at REITweek suggests that “balance point” is close or already at hand.

My team and I here at Wide Moat Research believe the retail sector could be a winner in 2024 as it continues to deliver growth and value. And my time at REITweek further solidified that belief.

Key Theme No. 3: Emerging Specialty Categories

In my latest book, REITs for Dummies, I highlighted several property categories that have evolved over the last decade within the REIT sector. Several of my favorites include cell towers, casinos, and cannabis.

So let me tell you what I heard from them…

Within the cell tower sector – which provides vertical infrastructure to wireless carriers like AT&T, Verizon, and T-Mobile – I especially like Crown Castle. And I naturally made time to hear from its CFO, Daniel Schlanger.

So many tech companies are looking to grow through international expansions, as the previous Realty Income example showed. But Schlanger had a different take I want you to know about.

“… the underpinning of all of our growth,” he said, “is the amount of wireless data demand in the U.S. And that data demand is growing in the neighborhood of 20%-30% every year because we all use our phones 20%-30% more every year than we did the year before.”

Crazy, isn’t it?

Crazy but true.

And it’s another example of our Made in America theme that we’ve been tracking here the past several months.

Another specialty play I like is VICI Properties (VICI), which owns trophy casino properties in very strategic markets.

One of its core assets is the Venetian Las Vegas, which has benefited from its proximity to the Strip’s newest structure, the Sphere Las Vegas.

As I learned on my trip there two weeks ago, that giant orb is quite the attraction. Equipped with the most advanced audio and visual capabilities the public can experience, it sold $314 million worth of tickets for its first two shows alone last year.

VICI confirmed what I’ve been saying about the boom in entertainment, gambling, and hospitality (catch up here).

Finally, I have to highlight my one-on-one meeting with NewLake Capital CEO Anthony Coniglio. NewLake provides real estate capital for state-licensed cannabis operators.

He told me that cannabis will likely be reclassified from Schedule 1 to Schedule 3. And that will provide “meaningful tax implications for (cannabis) operators.” This is a huge step to normalize legalization of cannabis in the U.S., he added.

Whatever you think of the product itself, a normalization of cannabis sales would be a big deal for the retail outlets that sell the products. And it’s something we’ll be keeping an eye on.

Commercial Real Estate Could Be Making a Comeback

I’m not one to lightly fall for enthusiasm and hype.

I’m very skeptical as a general rule. When I ask questions, I expect sufficient answers. If executives can’t provide the information I’m looking for and can’t verify details… I don’t buy. It’s as simple as that.

That wasn’t a problem at REITweek. The executives I heard from and spoke to were very detailed on the state of their businesses. And it painted a clear picture.

Commercial real estate still has its issues it’s working through. And yes, public perception is one of those issues. Most investors simply aren’t enthusiastic about CRE.

For now.

But if these REITs continue to raise expectations and meet them… or even beat them… I expect even the toughest skeptics will have to change their tune.

It’s been a tough few years for commercial real estate. But I’ve been working and investing in this area my entire adult life. I promise that cycles like these are not uncommon.

They never last.

And it’s usually in these depressed periods where the best investments are found. Our mission is to find those investments and share them with you, our reader.

Expect to hear much more in the months ahead.

Brad Thomas
Editor, Intelligent Income Daily