Rising interest rates have been a material headwind to real estate investment trusts (REITs) over the past year or so. That makes sense since higher yields make investments like CDs more competitive for income-oriented investors.
Interest rates also impact the cost of capital for REITs. But the property markets have adjusted to rising rates before, and investor worries are likely to be overblown if you have a long-term investment horizon. This is why you might want to jump on industry-leading REITs like Realty Income(NYSE: O), Prologis(NYSE: PLD), and AvalonBay Communities(NYSE: AVB) while there's still time (their stock prices are already starting to recover).
1. Realty Income's size is a key benefit
Realty Income's market cap is roughly $39 billion, which is about three times larger than its next-closest peer. Add in an investment-grade-rated balance sheet, and Realty Income's size is a material competitive advantage.
Realty Income can more easily sell stock and debt to raise capital, which keeps its costs low when it's buying new assets. It also has the scale to make massive acquisitions that smaller peers couldn't even consider, including buying up smaller competitors.
Realty Income has increased its dividend annually for 29 consecutive years, and its dividend yield is roughly 5.7% today. That yield is near the highest levels over the past decade, which suggests that the stock is attractively priced right now. In fact, the last time the yield was this high was during the early days of the coronavirus pandemic.
The portfolio is heavily focused on retail properties (nearly 80% of rents), and the REIT has a growing portfolio of European assets that add geographic diversification to its portfolio (this is fairly unique in the net lease sector). More conservative investors will probably find Realty Income quite appealing.
2. Prologis is a global warehouse powerhouse
With a market cap of $110 billion, Prologis is even bigger than Realty Income. That said, it operates exclusively in the industrial sector, with a massive portfolio of warehouses.
It is almost hard to fathom the size here, with Prologis owning 1.2 billion square feet of warehouse space across North America, South America, Europe, and Asia. The REIT is focused on owning assets in key transportation regions, making it something of a one-stop shop for large customers looking to build a reliable supply chain. Like Realty Income, Prologis has the heft to be an industry consolidator.
The dividend yield is a modest 2.9%, but that happens to be toward the high end of the yield range over the past decade. It's probably not as attractively priced as Realty Income, but there's a nuance here. Realty Income's dividend has grown at a roughly 3.8% compound rate over the past 10 years, while Prologis' dividend has grown at 11% annually over that span (with increases in each of the past 10 years). In other words, dividend growth investors might want to take a look at Prologis today.
3. AvalonBay knows how to bob and weave
AvalonBay is one of the largest apartment landlords you can buy, with a market cap of about $25 billion. The company's claim to fame is really its ability to shift between buying, building, and selling properties to maximize shareholder value over time.
The end goal is to ensure that money is being spent in the most advantageous way, given the prevailing market conditions. So far, AvalonBay has proven quite adept at changing with the world around it while keeping its portfolio modern and well-located (largely in and around major U.S. cities).
AvalonBay's dividend yield is 3.7%. Like the other two REITs mentioned here, that's toward the high end of the range over the past decade. One notable difference for AvalonBay, however, is that the dividend hasn't been increased every year even though it has trended steadily higher over time. If you can look past that relatively minor difference, the necessity value of apartments, combined with the REIT's size and strong operating history, make AvalonBay an attractive investment choice.
Act now, or you may miss the chance
While Realty Income, Prologis, and AvalonBay are all around 30% or so below their highs reached in 2022, they have all begun rising off of their recent lows. In other words, Wall Street might be getting more comfortable with the fact that rising interest rates aren't a fatal blow to any of these REITs. And if that's the case, you'll probably want to act sooner rather than later, because waiting too long to buy these industry-leading REITs could mean missing the opportunity completely.
Should you invest $1,000 in Realty Income right now?
Before you buy stock in Realty Income, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and Realty Income wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of December 11, 2023
Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Prologis and Realty Income. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.
