We're Watching These REITs as Fed Begins Rate-Cutting Cycle
There are many different flavors for these income generators and here are two we’re zeroing in on.
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Ahead of the Fed’s policy meeting outcome, we wanted to discuss real estate investment trusts (REITs) a bit further with you and lay the groundwork for any potential opportunities that present themselves in the coming days.
The 411 on REITs
REITs are companies that own, operate or finance income-producing real estate across a wide range of property sectors. These investments allow for the earning of income from real estate without having to buy, manage or finance properties themselves. That’s because REITs are required to distribute at least 90% of their taxable income to shareholders as dividends.
And, as we’ve discussed, as the Fed begins and moves down a rate-cutting cycle it should create demand for other investments that generate income and offer favorable dividend yields as yields offered from high-yield savings accounts are reset.
Several Flavors of REITs Out There
There are several different types of REITs, and each invests in a distinct aspect of real estate:
Data Center REITs own and manage data center facilities providing un-interruptable power supplies, air-cooled chillers and physical security.
Gaming REITs concentrate on owning experiential real estate assets in the form of casino and entertainment properties and leasing them through long-term, triple-net lease structures.
Healthcare REITs own and manage a variety of healthcare-related real estate and collect rent from tenants. Property types include senior living facilities, hospitals, medical office buildings and skilled nursing facilities.
Industrial REITs own and manage industrial facilities and rent space in those properties to tenants. Some focus on specific types of properties, such as warehouses and distribution centers.
Lodging and resort REITs own and manage hotels and resorts and rent space in those properties to guests. Typically, lodging REITs own different classes of hotels based on features such as the hotels’ level of service and amenities.
Mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
Office REITs own and manage office real estate from skyscrapers to office parks and rent space in those properties to tenants. Some emphasize specific classes of tenants, such as government agencies or biotech firms.
Residential REITs own and manage various forms of residences (such as apartment buildings, student housing, manufactured homes and single-family homes) and rent space in those properties to tenants. Some residential REITs also focus on specific geographical markets or classes of properties.
Retail REITs own and manage retail real estate, such as large regional malls, outlet centers, grocery-anchored shopping centers and power centers that feature big-box retailers and rent space in those properties to tenants.
Self-storage REITs own and manage storage facilities and collect rent from customers.
Telecommunications REITs own and manage infrastructure real estate and collect rent from tenants that occupy that real estate. These property types include fiber cables, wireless infrastructure, telecommunications towers and energy pipelines.
Timberlands REITs own and manage various types of timberland real estate. Timberland REITs specialize in harvesting and selling timber.
Diversified REITs own and manage a mix of property types and collect rent from tenants. For example, diversified REITs might own portfolios made up of both office and industrial properties, making them ideal for investors looking to gain exposure to a variety of real estate asset types.
Specialty REITs own and manage a unique mix of property types and collect rent from tenants. Specialty REITs own properties that don’t fit within the other REIT sectors. Examples of properties owned by specialty REITs include movie theaters, farmland and outdoor advertising sites.
REITs That We’re Interested in
The categories of REITs that we’re interested in for the Portfolio follow our thematic strategy, especially for the aging of the population and digital infrastructure. Based on the categories above, this means we are focusing, at least for now, on healthcare and data center REITS. And yes, they have had a nice run, especially as the market’s call for bigger rate cuts this year and next has emerged.
Our thinking, as you know, is the probability of the Fed telegraphing such moves is low.
On our radar screen are the following REITs:
- Equinix EQIX
- Digital Realty Trust DLR
- CareTrust REIT CTRE
- Community Healthcare Trust (CHCT)
- Healthpeak Properties DOC
- Omega Healthcare OHI
- Medical Properties Trust MPW
- National Health Investors (NHI)
- Ventas VTR
- And Bullpen resident WellTower WELL
Should the market’s reaction to the Fed’s policy decision and updated set of economic projections knock back some or all of these ETFs, we’ll look to down select from this list based on revenue, adjusted funds from operations and EPS growth prospects as well as their dividend yields.
