Real Estate Investment Trusts (REITs) fully participated in the 2022 bear market. Unlike the tech sector’s apparent recovery during the first quarter of 2023, REIT share prices have not shown signs of life.
Broadly speaking, REITs are down about 30% from the late 2021 highs.
That means now is a good time to make some selective REIT investments.
One REIT in particular has caught my eye…
REITs operate under special rules and tax considerations. An REIT owns commercial real estate. The REIT does not pay corporate income tax as long as it pays out 90% of net income as dividends to shareholders. Individual REITs focus on specific types of commercial properties. Here are some of the categories.
- Office buildings
- Hotels and lodging
- Apartment complexes
- Single-family rentals
- Industrial properties
- Self-storage
- Retail
- Shopping centers
- Healthcare properties
- Data centers
- Cell towers
Each sector comes with its own economic potential and challenges. For example, office REITs face challenging times as work from home policies remain in place, and companies are looking to downsize the amount of office space they lease. On the flip side, healthcare and self-storage REITs are mostly immune to the swings in the economy.
Rising interest rates have two causal effects. One is that as rates increase, investors expect higher dividend yields, which causes share prices to decline. The other is that REITs invest in real estate with a combination of equity and debt. Maturing debt must be financed at higher interest rates, increasing expenses, and lowering net income.
However, the broad sell-off of the REIT sector has taken down some superior REITs along with the marginal. I want to highlight one oversold REIT that should provide great future returns.
The key to REIT investing is finding companies that will grow dividends over the years. As a rule of thumb, you can expect annual compounding total returns of the annual dividend growth rate plus the yield in effect when you buy shares.
Alexandria Real Estate Equities Inc. (ARE) is a best-in-class, life science REIT making a positive and lasting impact on the world. As the pioneer of the life science real estate niche since its founding in 1994, Alexandria is the preeminent and longest-tenured owner, operator, and developer of collaborative life science, agtech, and technology campuses.
ARE properties are mission-specific, and tenant work cannot be done by work-from-home employees.
ARE currently trades for $123, compared to a 52-week high of $206. The shares yield almost 4% for a stock where the yield typically yields 2.0% to 2.5%. Dividend growth will average 8% to 10% per year. This REIT could easily produce mid-teens total compound returns for the next 5-10 years.
Alexandria Real Estate Equities is a portfolio stock in my Monthly Dividend Multiplier service. To see how to get access to my full list of companies growing their dividend yields fast, click here.
