10 Attractive Ways to Invest in REITs

Although rising interest rates are generally viewed as a headwind to real estate investing trusts, several leading advisors, and contributors to MoneyShow.com, believe much of this risk is already priced in to select stocks in the sector.

Here's a diverse group of favorites that the advisors believe offer a combination of solid income and long-term value.

Michael Elliott, CFRA Research's The Outlook

We have a positive fundamental outlook on the Industrial REITs sub-industry driven by continued tight supply/demand conditions and the long-term secular shift towards e-commerce.

E-commerce remains the biggest driver of demand for industrial real estate as it requires three times the logistics space of traditional bricks-and-mortar retail. For 2022, we forecast the market will remain tight for available warehouse space. We expect occupancy in the 96% to 98% range, with sustained high demand offsetting most new supply, especially within major port markets.

Among U.S.-based industrial REITs, Prologis Inc. (PLD) carries CFRA's highest investment recommendation of 5-STARS, or Strong Buy. PLD is the largest publicly traded industrial REIT, and its portfolio consists of approximately 1.0 billion square feet located across 19 countries and four continents. PLD has more than 5,800 customers, with Amazon  (AMZN) as its largest at 4.8% of net effective rent, and top-10 tenants comprising just 14% of total net effective rent.

Our Strong Buy opinion reflects PLD's exceptional business fundamentals supported by an aggressive acquisition and development outlook, elevated rental rate and NOI growth, a healthy balance sheet, Tier 1 market concentration, and positive long-term industry drivers.

PLD's scale advantage is likely to increase moving forward as the company recently agreed to acquire Duke Realty (DRE) in an all-stock deal worth about $26 billion, subject to regulatory approvals. If this deal goes through, as expected, PLD will likely be over ten times larger than the next closest publicly traded REIT peer, further entrenching its scale advantage.

Our 12-month price target of $158 is equal to a forward P/FFO multiple of 27.0x our 2023 FFO estimate, a premium to peers on PLDs higher quality portfolio and above-average growth potential.

Jim Pearce, Investing Daily's Personal Finance

Since adding storage real estate investment trust Iron Mountain  (IRM) to our Income Portfolio two years ago, it has posted a total return (share price appreciation plus dividends paid) of over 100% compared to a 25% gain by the S&P 500 Index.

Iron Mountain earns money by leasing space in its storage facilities to a wide variety of users. And lately, those users are increasing involved in data processing and blockchain technologies.

Demand for the firm's data storage services remains brisk. Iron Mountain achieved record financial results during the company's fiscal 2022 second quarter including all-time highs for revenue, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), and AFFO (adjusted funds from operations).

That last metric is perhaps the most important since AFFO determines how much of a REIT's cash flow is available for distribution to its shareholders. Over the first half of this year, AFFO was 11.2% higher than last year.

Iron Mountain has not raised its dividend in three years as it has used most of its free cash flow to restructure its asset base. If Iron Mountain can deliver on its aggressive guidance for full-year 2022 results, Wall Street won't complain about its stagnant dividend payments. But at some point, the REIT will need to start sharing more of the wealth to compete with gradually rising bond yields, especially if escalating inflation forces the Fed into making more rate hikes.

The company states that it is "approaching our long-term AFFO payout ratio (low to mid-60s) - from there we expect the dividend to grow in line with AFFO." If so, then that portends a 6% to 10% hike in the dividend next year, which is the company's guidance for AFFO growth. I don't see any reason to believe that it won't hit that target so I am raising our buy limit for Iron Mountain to $60.

Jim Powell, Global Changes & Opportunities Report

One sector that provides products and services that people must have no matter what the economy is doing is affordable housing for seniors. Of the many companies in the senior housing market, I think Ventas (VTR) -- a successful REIT -- has the most to offer investors.

Ventas looks particularly good because it is recovering from the Covid-19 epidemic. During that dark period, many tenants died and many more moved out to be cared for by their families. As occupancy fell, so did revenues. As a result, in 2020 Ventas was forced to cut its dividend. Investors who thought the cut indicated the company might be on the verge of going bankrupt bailed out of the stock.

The Covid-19 epidemic is now manageable -- and Ventas is bouncing back. Occupancy levels during the second quarter increased 3.9% to 83.7%. The company expects occupancy to rise another 2.5% to 3.0% in the third quarter. The company's rebound is clearly underway.

Ventas is now focusing on lowering its costs -- which will go directly to profits. The improving numbers should begin to appear later this year. Meanwhile, Ventas restored its dividend and currently pays 3.74%.

Ben Reynolds, Top 10 REITs

SL Green Realty Corp.  (SLG) is Manhattan's largest office landlord, with 64 buildings totaling 34 million square feet. The REIT has 42 years of experience in Manhattan, so it has great expertise in the area. It raised its dividend by 2.5% in late 2021 and has raised its dividend for 11 years in a row.

SLG is currently under pressure due in part to the pandemic, which has caused a work-from-home trend. However, SLG has a reasonably strong balance sheet for a REIT, as its net debt of $5.1 billion is just 10 times its annual FFO. Thanks to its financial strength, SLG can endure the crisis and emerge stronger when the effect of the pandemic fades. Its 8.1% dividend is well covered.

Based on expected 2022 FFO per share of $6.60, SLG trades for a price-to-FFO ratio (P/FFO) of 7.0, which is much lower than its five-year average of 12.4. An expanding P/FFO multiple could boost returns by 12.2% per year over the next five years. When the 5.0% earnings growth and 8.1% dividend are also added, we expect extremely high total returns of 22.1% per year over the next five years.

Douglas Emmett  (DEI) is the largest office landlord in Los Angeles and Honolulu, with a 38% average market share of office space in its submarkets. It has approximately 2,700 office leases in its portfolio, with annual revenue of $1 billion.

Its markets have the highest barriers to entry among the U.S. gateway markets. New office development in its core L.A. markets is limited due to restrictive zoning laws, density limits, and anti-growth community sentiment. Thanks to these advantages and the healthy payout ratio of 55% of the stock, its 5.3% yielding dividend is safe.

Based on expected 2022 FFO per share of $2.05, the stock trades for a 10-year low price- to-FFO ratio (P/FFO) of 10.2. Our fair value estimate for this REIT is a P/FFO of 15.5. An expanding P/FFO multiple could boost shareholder returns by 8.6% per year. When added to the expected annual FFO per share growth of 5.0% and the stock's 5.3% dividend yield, we thus expect total returns of 17.2% per year over the next five years.

John Buckingham, The Prudent Speculator

Alexandria Real Estate  (ARE) is a REIT that owns, operates and develops lab space for life science research in major U.S. markets. ARE has an asset base of 41.1 million rentable square feet (RSF) of operating properties and another 33 million RSF in construction and multi-year development. Given global demographic and health trends, we expect life sciences to continue to grow at a high rate, and we see Alexandria as the premier name in the space.

Of course, rising interest rates, concerns about a softer economy and slowing industry leasing activity have conspired to send shares down some 30% this year. However, ARE's trends remain strong, the company is well-positioned on many fronts and its boasts consistent execution.

Management expects occupancy levels to stay in the 95% to 96% range for the rest of 2022, and they raised estimates for per share funds from operations (FFO) for 2022 to $8.41 based on cost savings and solid recent results. 97% of ARE's leases contain a contractual annual rent escalator of approximately 3%.

The consensus analyst FFO estimates for 2023, 2024 and 2025 are a respective $9.08, $9.83 and $10.44, so there is handsome growth projected, even as we see ARE's base of tenants as defensive with healthy long-term demand for biomedical research. The shares yield a respectable 3.1%.

Marty Fridson, Forbes/Fridson Income Securities Investor

Agree Realty Corp.  (ADC) is a retail REIT with a portfolio value in excess of $6 billion. As of 06/30/22, the company owned and operated a portfolio of 1,510 community shopping centers and single tenant properties located in 47 states.

ADC's solid credit profile is supported by its low leverage, flexible capital structure, and strong liquidity characteristics. Moreover, the REIT has a very resilient operating portfolio that largely consists of unencumbered properties.

At the end of first quarter 2022 the ground lease portfolio was fully occupied, while the total portfolio was 99.6% occupied with a weighted average remaining lease term of 9.1 years.

This investment's dividends are taxed as ordinary income, The firm's common shares are suitable for low-risk tax-deferred portfolios. Buy at $88 or lower for a 3.20% annualized yield.

LTC Properties, Inc.  (LTC) is a health care REIT that invests in senior housing and healthcare properties, through triple-net lease transactions, sale-leasebacks, mortgage financing, and joint ventures. Its properties are located in 29 states. The company's portfolio is geographically dispersed throughout the Mid-Atlantic, Southeast, Midwest, Southwest, and West Coast states.

LTC reported second-quarter 2022 adjusted funds from operations (AFFO) of $25.3 million or $0.64 per share, topping analysts' estimates by a penny. AFFO results climbed 14.3% from a year ago. Total revenues of $43.0 million were up 12.8% from the prior-year second quarter period.

LTC's earnings and revenue momentum should continue throughout the remainder of this year into 2023. As a result, we remain positively disposed towards the company's financial outlook and dividend capacity and continue to recommend LTC as a suitable investment for medium-risk tax-deferred portfolios. Buy at $56 or lower for a 4.07% annualized yield.

Todd Shaver, Bull Market Report

In its second quarter, Massachusetts-based Office Properties Income Trust  (OPI) reported $140 million in revenues, up 3% YoY, compared to $137 million a year ago. The company posted a profit, or funds from operations at $60 million, $1.22 per share, as against a profit of $55 million, or $1.15 per share during the same period last year.

The company continued to witness steady momentum when it comes to leasing activity, with 680,000 square feet being leased during the quarter, with a 5% roll-up in rents, and a weighted average lease term of 9.2 years. This includes a mixture of new leases and renewals, both aided by a euphoric real estate market, and a cheap credit environment, which as we've known for some time, is coming to an end.

Following a 30% drop year-to-date, the stock presents a delectable yield of 12%, which when coupled with a payout ratio of just 50%, and a tenant pool that is mainly composed of government entities, represents a stellar opportunity for investors, which is unlikely to last for long. With $26 million in cash, $2.5 billion in debt, and $200 million in cash flow, it remains a great value pick, with a substantial margin of safety. Our target is $25, with a sell price of $15.

Michael Foster, Contrarian Outlook

If you're a follower of REITs, you know that they took a particularly hard hit during the pandemic, especially office REITs, as it appeared that the shift to working from home would make their business models obsolete. Except that's not how things actually turned out.

But the market is overlooking this and that's where our buying opportunity comes in. People still need real estate, no matter where interest rates are, and inflation is causing rents to go up, benefiting REITs even further.

As CEF investors, we can get top REITs for even cheaper than the market price when we buy through a fund the Cohen & Steers Quality Realty Fund (RQI) . Note the word "quality" in the name -- and that's not marketing.

RQI's portfolio focuses specifically on REITs that have seen rising free cash flow, like American Tower (AMT) , Prologis (PLD) and Public Storage (PSA) . These are all companies that have delivered strong total returns for years, and through all market weather.

Its portfolio of cash-boosting real estate companies is why RQI has clocked in an 11.4% average annualized total return over the last decade, more than double that of the broader REIT market.

Does this outperforming, high-quality, high-income-producing fund trade at the premium it deserves? Hardly. Thanks to market fears, it's dipped to a 3.3% discount, giving us some nice "bonus" savings on top of the deals we're getting in the already-cheap REIT market.