Rising interest rates have led investors to dump income-oriented investments like real estate investment trusts (REITs). Why take on a potentially risky stock when you can buy a relatively safe CD with a 5% yield? The problem is that CDs don't offer the opportunity for business, and thus income, growth.
That's why you might want to consider REITs that are trading near their low points, like Realty Income(NYSE: O) and Ventas(NYSE: VTR).
Realty Income is the bellwether net lease REIT
With a market cap that's roughly 3 times larger than its next-closest rival, Realty Income is the undisputed king of the net lease sector. In fact, it just agreed to buy one of its smaller peers, Spirit Realty Capital, in a $9.3 billion transaction. What's important here is that Realty Income has the heft to do things that its smaller peers simply can't. That includes acting as an industry consolidator, but it can also make larger property acquisitions (including multi-property portfolios), as well. That's a big point of differentiation.
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There's more to like, however. Being large also provides greater access to capital via stock sales and bond issuances. That helps to keep Realty Income's cost of capital down, which is further aided by its investment-grade-rated balance sheet. There's a lot to like here from a business perspective, including geographic diversification given the REIT's growing exposure to Europe. That's a region that is only just beginning to embrace the net lease model.
Net leases require tenants to pay for most property-level operating costs and often involve sale/leaseback transactions. Essentially, a company looking to raise capital sells a property but retains effective control over it via a long-term lease and property-level maintenance responsibilities. It's a win/win for the REIT and the tenant. With interest rates on the rise, Realty Income believes there's growth ahead for the sector as corporate bonds mature and companies look for alternative sources of capital to pay them off.
Although the stock has picked up of late, it is still down more than 20% from its 52-week highs. The dividend yield is an attractive 5.7% backed by a dividend that's been increased annually for 29 consecutive years.
Ventas has some ground to make up
Ventas' share prices are down around 15% from their 52-week highs. But that's not the full story because the healthcare REIT got battered during the coronavirus pandemic and still hasn't fully recovered. Strangely enough, however, peer Welltower is up nearly 30% over the past year while Ventas has, effectively, gone nowhere. That suggests that Ventas could see some upside from here, noting that it is fairly similar in structure to Welltower.
To be fair, Ventas has continued to face lingering impacts from the pandemic that don't appear to be a problem for Welltower. But Ventas is putting out the fires as they pop up and its senior housing portfolio is showing strong results as the U.S. business here continues to recover. Once investors begin to feel like the string of one-off tenant issues has ended, the performance gap between Welltower and Ventas is likely to close.
In the meantime, investors can collect a roughly 4% dividend yield. Although the dividend payment has been static since a cut during the pandemic, ongoing performance improvements suggest that dividend growth will eventually return.
Time for some deep dives
Net lease giant Realty Income is an opportunity from just about any angle you consider it. But you had better act soon because investors are already jumping on the chance to own this industry-leading REIT. Ventas is more of a comparative bargain, noting the disparate performance between it and a close peer. That gap is likely to close as investors get more comfortable with Ventas' improving business prospects.
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Reuben Gregg Brewer has positions in Realty Income and Ventas. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
