Real estate investment research firm Nareit claims that 2024 is the year REITs are “well-situated for outsized performance.” Nareit based their assessment on the assumption that the Fed is nearing the end of its current interest rate hiking cycle.
But what if everyone’s collective dreams of lower rates don’t come to fruition in 2024? Income and REIT investors face a conundrum. Many REITs are priced to buy, but jumping in too early might mean underperformance if the Fed doesn’t drop rates.
A handful of REITs are ready for higher rates. These REITs tend to have bulletproof balance sheets and a long list of quality tenants in high-demand areas or sectors that aren’t impacted by higher rates (or are impacted less). Likewise, REITs that top the list of investments for higher rates have competitive yields, which is increasingly hard to come by as short-term Treasuries continue returning north of 5%.
Realty Income (O)
Realty Income (NYSE:O) tops the list of REITs for higher rates based on multiple unique factors that make it all but bulletproof. That may seem somewhat contradictory, considering many of Realty Income’s tenants are retail-based in a rapidly digitizing world where shoppers are staying home.
But, despite 80% of its tenants operating within retail, most operate in recession-resistant sectors. The bulk of Realty Income’s tenants operates within the grocery store niche, followed by convenience stores, dollar stores, and drug stores – a fairly untouchable blend.
Structurally, the company’s triple-net lease model shifts all operational risks and costs to tenants, alongside property maintenance costs. This helps shield it from higher material and labor costs that rise alongside rates. Better yet, Realty Income’s leases often extend for 15 years or more, with options for renewal, ensuring a consistent rental income. Their current lease agreements average just below 10 years until renewal, meaning the REIT has plenty of wiggle room over the next decade, whether interest rates remain high or not.
Also, Realty Income is part of the Dividend Aristocrat class, offering monthly distributions to boot, with a yield sitting at 5.66% today.
Apartment Income REIT Corp. (AIRC)
Higher interest rates mean fewer new mortgages, in general. At the same time, though, rents are increasing to match inflation’s pace. Both factors make Apartment Income REIT Corp. (NASDAQ:AIRC) attractive among REITs for higher rates, though it also has standalone qualities, making it a top investment.
AIRC streamlined its multifamily building portfolio over the last decade, focusing on top assets in metropolitan areas with strong demographic trends. This strategy offers for high occupancy rates and consistent rent increases. Factors influencing AIRC’s future demand include job and income growth, lower homeownership rates, and the appeal of urban centers – all affected by higher rates.
Over the past decade, Apartment Income REIT Corp. has refined its portfolio and strategy. Despite trimming its overall properties from 300 in 2008 to “just” 75 today, it maintained a consistent asset count in core markets. This shows that management knows where they operate best and is willing to take steps to optimize those areas, even at the cost of apparent “growth.” Likewise, exiting lower-growth markets boosted the portfolio’s growth potential and positions it for success regardless of interest rates.
Currently, AIRC yields 6.27%, making it a top pick among income investors for its Treasury-beating yield.
Healthpeak Properties (PEAK)
Healthpeak Properties (NYSE:PEAK) is one of those REITs that will succeed no matter the interest rate climate. Healthcare is a perennial favorite of buy-and-hold investors. But those looking at REITs for higher rates would do well to consider this unique pick.
After the pandemic made senior living facility management mostly untenable, PEAK took a decisive step in 2020 and 2021 to sell off most of its senior housing assets for about $4 billion. Following the move, PEAK leaned into life science and medical office portfolios after reinvesting the senior housing sales proceeds into these real estate segments. With high-quality assets in leading markets and equally high-quality tenants in both segments, the company has an undeniable edge. Further, Healthpeak stands to benefit from shifting regulatory winds facing healthcare.
Many expect imminent changes to the Affordable Care Act that will emphasize a shift towards high-quality care in cheaper settings. With quality facilities in niche markets, big-name players like PEAK will likely attract increased demand from premier healthcare systems.
PEAK’s current yield is a whopping 7.31%, a stat that will likely remain steady as demand for quality healthcare properties climbs.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.