Rising interest rates have hit real estate investment trusts (REITs) particularly hard. Other income alternatives are now more competitive, drawing dollars out of the sector. And higher rates lead to higher costs for REITs.
Wall Street has punished a lot of REITs, perhaps for good reason, but that has resulted in a few well-run companies ending up with historically attractive yields. Here's why you might want to start looking at Realty Income(NYSE: O), Rexford Industrial Realty(NYSE: REXR), and Public Storage(NYSE: PSA) while the three REITs appear to be trading at a discounted price.
1. Realty Income is still finding ways to grow
Realty Income isn't immune to the impact of higher rates. In fact, it might actually be more exposed than other REITs. That's partly because it is so dominant in the net lease space (a net lease requires the lessee to pay most property-level operating costs). It is nearly 4 times the size of its next largest peer, which means that it has to ink a lot more deals to grow. Or, put another way, it needs to tap capital markets more frequently so rising rates will start to pinch fairly quickly.
This is one of the reasons why the shares have fallen 30% from their peak levels before the 2020 pandemic. The dividend yield is currently around 5.6%, which is near decade highs. That suggests that the stock is trading at a discount. Meanwhile, given the REIT's size, it tends to have advantaged access to capital markets relative to peers. It is also investment-grade rated and has a broad geographic reach with operations in the United States and Europe. Even if the company's growth slows down, Realty Income is highly likely to muddle through to better days while continuing to reward investors all along the way. Notably, the dividend has been increased annually for 29 consecutive years.
2. Rexford Industrial is big where it is focused
Unlike Realty Income, industrial REIT Rexford is not the biggest name within its property type. But it is one of the most dominant players in the Southern California market where it has chosen to focus its investment efforts. Industrial REITs were all the rage during the pandemic because warehouse space was in high demand. Wall Street has moved on from that story as demand has begun to cool. The stock is down over 45% from peak levels in 2022. With rising interest rates and a slowdown in the industrial property niche, that makes sense.
Only Rexford is still passing on sizable rent increases as leases renew. It also has notable plans to redevelop assets already in its portfolio so it can charge more rent. The Southern California market is one of the best industrial markets in the United States. In other words, it looks a bit like Rexford got caught up in a Wall Street fad that's now over, but nothing has really changed about the REIT's long-term story. Meanwhile, the stock decline resulted in a near decade-high dividend yield of 3.7%. Note that the dividend has been increased annually for 11 consecutive years with a very rapid 16% annualized growth rate over the past decade.
3. Public Storage is a place to put your junk
Public Storage and Rexford have similar stories, as demand for self-storage units picked up during the pandemic and then cooled off. The stock has lost around a third of its value since reaching a high-water mark in 2022. The interesting thing is that self-storage units tend to be fairly low-maintenance and highly sticky. Not many people want to move their belongings just to save a few bucks. The bigger issue is that demand has led to an increase in supply, so there's more competition for new customers. With a market cap of around $45 billion, Public Storage is one of the biggest players in the industry, so this is a headwind. This backstory helps explain the historically high 4.5% dividend yield.
To be fair, Public Storage's adjusted funds from operations (FFO) was down about 1% year over year in the first quarter of 2024. But with a massive portfolio of over 2,500 locations, Public Storage is well positioned to remain a dominant player in the storage sector and may even end up acting as a consolidator. Longer-term, demand seems likely to remain robust with the elevated cost of housing leaving many consumers locked out of buying a new, perhaps larger, home for their growing piles of stuff. The dividend hasn't been increased every year, but it has trended higher over time. If you like buying industry leaders while they are unloved, this could be your opportunity to buy Public Storage.
Don't ignore the opportunity
There are a lot of REITs that have been put on the sale rack right now; Realty Income, Rexford Industrial, and Public Storage are just three of them. But they offer unique stories, with two being flat-out industry giants and one being a giant in an attractive geographic market. If you are trying to find stocks that are on sale, all three should be on your shortlist for a deeper dive. It's likely that one or more could end up in your portfolio this year.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income and Rexford Industrial Realty. The Motley Fool has a disclosure policy.
