Real estate investment trusts (REITs), or securitized portfolios of real estate properties, have been on a tear in 2022, losing some of their luster recently with the rise of mortgages, as investors fear that REITs may drop in price.
However, REITs are delivering twice the income of the broader market when analyzing the averages, indicating that there is still a solid investment case in such instruments. If the economy continues performing without massive drops, the dividends paid out by REITs, in general, should be fairly secure.
Real estate owners can increase the rent during inflationary periods, possibly aiding REITs’ historically solid dividend growth track records. Following this train of thought, Finbold analyzed the REIT universe and picked the three best REITs to own in Q4 2022.
Picks for you
1. Easterly Government Properties (NYSE: DEA)
Easterly counts the US government as their main client, which shields them from inflationary pressures, and the home-office trends seen during the past two years. The REIT provides office space to mission-critical US Federal Agencies, owning 87 operating properties and an additional six that they own jointly with the government.
Moreover, 99% of their properties are rented out, with leases backed by the US government, thus reducing the risk of incurring a default from its tenants. Further, the chance of vacant properties seems low, which explains their 99% occupancy rate. Barriers to entry into this space seem pretty steep, thanks to the firm’s procurement process and the culture of government agencies.
Year-to-date (YTD), shares are down 31.88%, not reflecting the real opportunity this REIT offers.
In the last month, DEA has been trading in the $15.32 to $18.63 range, staying below all moving averages. Technical analysis indicates a resistance line at $17.76 and a support line at $15.22.
Wall Street analysts rate DEA stock a ‘hold,’ with the average price in the next 12 months reaching $21.50, 36.33% higher than the current trading price of $15.77. Notably, out of 4 Wall Street analysts, 1 has a ‘buy’ rating, and three have a ‘hold’ rating.
2. Postal Realty Trust (NYSE: PSTL)
Similar to Easterly, Postal also deals with ‘Uncle Sam’ as the sole customer, and their real estate is currently 99.7% occupied, with leases lasting up to four years. This can be a double-edged sword, as leases are short-term, but on the other hand, it can give some negotiating power to the firm once leases expire and inflation is high. Furthermore, US postal service (USPS) has renewed its lease 98.8% of the time over the past ten years.
Each renewal the company makes is inflation and other market conditions adjusted, thus offering an opportunity for organic growth. USPS budget is not subject to inflationary pressures as mail and packages have to be delivered, recession or not.
While two potential catalysts, such as the inclusion into the Vanguard Real Estate ETF and beating analysts’ estimates, could lift the stock, the risk of a competitor coming to market and buying every property that exists. While the first two are plausible, the second one doesn’t seem probable any time soon.
YTD share dropped 25.38%, possibly offering an entry position for investors looking to invest in a niche REIT. Over the past month, shares traded from $14.24 to $16.03, staying in the lower part of its 52-week range and below all moving averages. Technical analysis shows a support zone from $14.31 to $14.35 and a resistance zone from $15.41 to $15.68.
Analysts rate the shares a ‘moderate buy,’ predicting that in the next 12 months, the average price could reach $18,00, which is 22.70% higher than the current trading price of $14.67. Out of the three analysts covering the company, two have a ‘buy’ rating and one has a ‘hold’ rating.
3. Realty Income (NYSE: O)
A long-term favorite of dividend investors, Realty Income has seen some short-term pain after the Federal Reserve (Fed) decided to go on their historic 300 basis points rate hikes in 2022. On August 3, the firm posted its Q2 20222 guidance, indicating that 98.9% of its real estate portfolio is leased out and that they expect to acquire new real estate for $6 billion as opposed to the initially announced $5 billion.
On September 13, the firm announced its 117th dividend increase since listing on the NYSE in 1994. Investors will now get $0.248 per share each month, making this a 0.2% dividend increase.
YTD, the stock lost 18.26%, reflecting the fear that is present in the markets surrounding real estate. When comparing the performance of all stocks over the past year, O is only a medium performer in the overall market, outperforming 49% of all stocks.
Over the past month, O traded in a wide range from $57.61 to $68.90, with technical analysis suggesting that the support zone is from $57.94 to $58.19 and the resistance line at $72.74.
TipRanks analysts have a ‘moderate buy’ rating consensus, seeing the average price in the next 12 months reaching $75.44, 29.62% higher than the current trading price of $58.20; notably, there are six buy and four hold recommendations.
Despite the gloom and doom in the markets, the three REITs above present solid opportunities for investors looking for long-term gain and a specific market niche. The price action in these stocks reflects more the fear in the markets rather than the fundamentals and outlook for these REITs.
Barring a broad meltdown in all asset categories, the three above should perform well and bring in monthly and quarterly paychecks to patient investors.
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Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
