3 REITs That Should Rock In 2023

Summary

• The year has been a testing ground for investors.
• The following three REITs will get 2023 off the a good start.
• The dividends will keep on flowing and allow you to steadily build your wealth.
• Looking for more investing ideas like this one? Get them exclusively at iREIT on Alpha. Learn More »

alphaspirit

This article was co-produced with Cappuccino Finance.

It’s hard to maintain trust and focus during times of volatility, even though this is the time that you most need the trust and focus. 2022 has certainly been a testing ground for investors.

With bad news following bad news, and underlying inflation troubling people at the grocery store and stock market alike, it has been difficult to keep faith in our investments.

Now the Fed has dashed more cold water in the face of investors with their resolve to stay aggressive on inflation. The light at the end of the tunnel seems like it just got a little dimmer.

In times like these, the following three real estate investment trusts ("REITs") will give you some peace of mind over the holidays, knowing that your money is safe and working hard for you. The dividends will keep on flowing and allow you to steadily build your wealth.

Invitation Homes Inc. (INVH)

Invitation Homes is a leading owner and operator of single-family homes for lease, and they offer high-quality homes in high demand neighborhoods across America. They have over 86,000 homes in their portfolio, and their properties are in high demand.

The average resident satisfaction score for their houses was 4.3/5, and the same resident average occupancy rate was 97.5%.

Invitation Homes portfolio and revenue has been growing substantially in the past several years. Their revenue growth in the past 5 years has been 17.75% CAGR, and the adjusted funds from operations ("AFFO") growth rate has been 13.86% CAGR in the same time span. Given that their markets lie in high growth areas of population, I expect the trend to continue well into the future.

Investor Relations

The dividend of Invitation Homes is safe at this point. The cash dividend payout ratio is at 49.17%, and FFO payout ratio is at 53.99%. There is a substantial cushion between the cash flow and their dividend payout.

Their valuation is favorable as well. The current P/AFFO of 24.3x and P/FFO of 16.78x are about 25% below their 5-year average.

The negative sentiment towards the real estate market caused by high mortgage rates had led to this favorable valuation. Investors can grab some share at a discount.

FAST Graphs

VICI Properties (VICI)

VICI Properties Inc. is a REIT that primarily engages in the business of owning, acquiring, and managing gaming, hospitality, and entertainment destinations. Their portfolio includes impressive names like Caesar Palace Las Vegas, Harrah’s Las Vegas, and Venetian Resort.

The weighted average remaining lease term is a whopping 43.7 years.

Not only that, but VICI owns about 34 acres of undeveloped or underdeveloped land near the Las Vegas Strip, which can be monetized when the time is appropriate.

Investor Relations

VICI has a strong capital structure and ample liquidity to further improve their already impressive portfolio. Their LQA net leverage ratio is 5.8x. They have revolving credit facility capacity of $2.5 B, and delayed draw term loan capacity of $1.0 B. Their total liquidity capacity is an impressive $4.7 B.

With this strong capital structure and great liquidity, they won’t have any trouble supporting their acquisition and development plans in the future. I expect them to maintain their leadership position in the gaming and hospitality industry.

Management described the 3Q 2022 results as demonstrating “realization and continuing activation.” By realization, they mean growth since 2021, and by activation, they mean continuing investment in the non-gaming segment.

Revenue grew by 100% compared to the same quarter in 2021, and the impact from the acquisition of the Venetian and MGP was a large part of the growth. AFFO grew by 83% YoY, and AFFO per share grew by 8.5% YoY.

The growth in AFFO was followed by a dividend increase of 8.3%, which has resulted in a dividend growth rate of 8.2% CAGR since 2017 for VICI.

Also, VICI’s 4.7% dividend yield is safe at this point, shown by cash dividend payout ratio of 61.47% and AFFO payout ratio of 79.46%.

VICI is currently undervalued. P/AFFO of 18.02x and P/FFO of 15.73x is about 10% lower than their historical average. The iREIT ratings tracker shows that the margin of safety for VICI is at 7%.

The market wide volatility and fears of recession have created a great opportunity here for investors.

FAST Graphs

Equity Residential (EQR)

Equity Residential is a REIT that owns and operates high-quality rental apartment properties. Their main markets include Boston, New York, Washington D.C., Southern California, and Seattle.

Their properties are well managed and in high demand, shown by an exceptional occupancy rate of 96.3%, and the quality of the portfolio has improved over the course of the year (same unit revenue growth of 10.6% for 2022).

Investor Relations

Equity Residential’s management expects the strong growth to carry into 2023. As in-place leases expire and are renewed at the prevailing market prices, the revenue is expected to grow.

Currently, Equity Residential’s Loss to Lease (in-place lease price compared to the current rate) is about 5.1%. Essentially, this means that the portfolio of current leases is about 5.1% below the current prevailing lease rate. Therefore, over the course of 2023, Equity Residential’s revenue will grow.

Equity Residential’s dividend is safe at this point, as demonstrated by a cash dividend payout ratio of 66% and FFO payout ratio of 72.87%.

Also, Equity Residential is undervalued at this point. Their current P/AFFO of 23.67x and P/FFO of 16.05x are about 23% below their 5-year average. The iREIT equity rating tracker shows that Equity Residential’s margin of safety is at 17%.

The recent slump of the real estate market and sour consumer sentiment over the high interest and mortgage rates have created another great opportunity for investors.

FAST Graphs

Risks

As many of us expected, the Federal Reserve came out and raised the interest rate by 50 basis points. That was welcome news and experts expected the market to gain some momentum.

However, Jerome Powell’s comments remained rather hawkish, indicating that the Federal Reserve is still not happy with the inflation rate. The Federal Reserve will maintain a high interest rate until their job is “done.”

This hawkish tone poured cold water onto the market yet again, and the bear sentiment returned in full force. It will be hard for the stock market to gain momentum in this environment, and these three REITs are going to struggle right along with the market.

As recessionary pressure mounts, capital availability will be reduced in the short term. Less capital equals fewer real estate transactions. A slow transaction rate and less capital availability may negatively impact the REITs’ growth plan.

Fewer properties available on the market will slow down the acquisition activities, and the spread between the buyer and the seller may increase.

Conclusion

Christmas is almost here.

It’s typically a very happy time for everyone.

However, fears of recession and high inflation are bringing some gloomy sentiment to the market.

But it’s not all bad news, though. Unemployment has stayed at a historically low level, and hospitality, leisure, and restaurant industries roared back this year. These trends should help the three REITs mentioned here.

It’s hard to keep trust in a volatile market and stick to your long-term goals. However, slow and steady wins the race. Keeping a long-term perspective and investing money in these three solid REITs has been a winning formula for many years.

I believe the formula holds true at the end of 2022 and beyond for sure.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of EQR, INVH, VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

Comments

[Cdn_divman]

When I see statements like "VICI is currently undervalued. P/AFFO of 18.02x and P/FFO of 15.73x is about 10% lower than their historical average." I have to ask, what was the interest rate environment during that historical time? And what period does it cover?

If those evaluation measures were restricted to a period when rates were 1 or 2%, how does that prove we are undervalued now. At 5% interest perhaps we are overvalued. I need more information on what constitutes "historical ".

[theheckwithtech]

Long VICI and EQR, but being in the construction industry and knowing the poor quality of INVH homes (at least in Florida), and knowing the massive amount of construction defect lawsuits that continue to pour in this market, I'm avoiding that one. Even if the rental segment is insulated somewhat from these lawsuits, it's a matter of principle for me. I cannot support a company that goes against my personal quality standards.

[drjoanv]

Dave D R. I couldn't agree more with you. I have said over and over again on these "REIT" sites.....Wait to buy until Powell STOPS raising rates. I owned a lot of REITS in the past...sold out most by Jan 2022 (wished I had sold all of them).
One author in particular (not Brad) continues to say: "don't worry about the fact that the price has gone down by 30-40%...you get that "wonderful" dividend. If his followers had waited, they could have bought at the current discount of 40% and benefited by it. I realize that the authors here want to sell subscriptions, but it is unconscionable to continue to say "buy the dips".

[Chowder]

@drjoanv >> If his followers had waited, they could have bought at the current discount of 40% and benefited by it. <<

Although that's true, we only know that in hindsight.

Sometimes in these comment streams we assume everyone has the same goal but it often boils down to people with different goals and those goals require different actions.

Some people are into capital preservation more while others are into accumulation. If I am going to build a large position over time, I can't keep selling every time I think the market is going to correct. I have to manage my position.

As someone wanting to accumulate a large position, I only buy the REIT's I would automatically add to if the position did in fact correct 40%, and I'd do it without reservation. In buying as prices drop, I'm building a position while at the same time I'm lowering the cost basis.

A different tactic because the goal is different, it's accumulation as opposed to capital preservation. And I'm not suggesting capital preservation is wrong for others.

[Dr.DaveR]

@Chowder generally true, but you have to admit that this market drop has been telegraphed in the macro, the technicals and the valuations. The fed has repeated and repeated that they are crushing the wealth effect. All you had to do was listen and study a bit of market history. Once we found resistance on the trendline the second time, the following times were textbook rejections. This has, so far, been the textbook case of a structural bear market. I agree that there are great companies to buy, but not fighting the fed and sitting in cash has been the winning strategy for 12 months. Now the question is whether the lagging effects of the record pace of rate heights only retests lows or breaks something. Guessing which companies with hold up better than others is just a guessing game in the short to medium term.

[Dr.DaveR]

@drjoanv it's not just the REIT sites, it's 98% of authors saying to buy dips in a clear bear market. Patience is the key here, not buying every lower low.

[RoseNose]

Merry Christmas Brad, enjoy the family, be happy and stay safe! Rose:))

[JBTCP]

@Brad Thomas I know in the very recent past you've spoke glowingly about Power REIT. With PW having had a monumental crash recently and now being below $4/share, what are your thoughts? Thanks.

[kjones2000]

With rents and housing prices both dropping, I would be very cautious with REITs. There are better times ahead but I think it’s after the housing reset that is taking place.

[seolink30]

Thank you, great content.

[Brad Thomas]

@seolink30 You're welcome. Happy Holidays!

[Dr.DaveR]

I enjoy your analyses on REITs. However, sitting in cash would have outperformed all of your buys for 2022. This is not the time to buy anything but to stack more cash and wait for the real recessionary, generational opportunities.

[Brad Thomas]

@Dave D R You're welcome. Thanks for reading and all the best!

[Woody1959]

Hi Brad.
I recently joined Intelligent Income and enjoy your guidance/articles. As a matter of fact, I will be joining your Elite offering shortly. I have a portion of my IRA in REITS via Cohen and Steers Quality Income and was wondering what you think of that CEF? I realize it can be volatile and it did get hammered in 2008. I also have my eye on “O” but would like to see it pull in a little bit. Happy Holidays to you and your family.
Woody

[Brad Thomas]

@Woody1959 Thank you. Happy holidays!

[ihookem]

There is no reason for REIT's to fall like this. My REIT portfolio gained .64% today , although only cause MPW did over 8% , but still. FREL only lost .27%. CCI gained about .5% . On a day like today, that is very telling that the sector may have bottomed out.

[erlichi]

AIRC that was spun off from AIV is mostly in the same markets as EQR and about 15% cheaper, with a div of 5.25%. I like EQR, but AIRC is a better deal.

[Overfished]

@Brad Thomas
Happy holidays Brad, and have a great new years as well.

The REIT I am choosing right now is ESS.

Thank you for all your teachings here; I am glad I have been open to learning from you and how to make my own good choices. I own many of the stocks you have recommended and am very pleased with the results.

Fish

[birder]

I do like EQR and VICI and own a fair amount of each. I am not fond of INVH. Much prefer apartments such as EQR, ESS, and MAA.

[Brad Thomas]

@birder I like INVH for the growth prospect, although I expect VICI to also be a top grower in 2023. Happy holidays and all the best

[Ret2030]

I am not morally able to invest in INVH as this REIT and several others have destroyed typical
Supply/Demand models and permanently and negatively affected the market for first and second time home buyers. Screwing over the little, individual and stacking the deck for the money mongers.

I did the same for the BUCHA’s- Blues, United, Cigna, Humana, Anthems after the un-Affordable Care Act allowing the massive transfer of health and wealth to the big “Health” Ins Conglomerates. Check their stock returns and tell me how this was healthy for the Employers and people who pay the premiums and costs of care.

I’ll find other ways to make a profit. And Sleep Well At Nite.

[Brad Thomas]

@Ret2030 I was raised by a single hard-working mom, and I know what you mean. I watched my mother sweat out 3 jobs to raise 2 boys and I knew early in life that I wanted to be a landlord not a tenant. REITs are a perfect way to become a LL without the drama of the 3 T's (taxes, tenants, toilets). As always, thanks for reading and Happy Holidays!

[Overfished]

@Ret2030
then perhaps a tobacco stock?

Fish

[Ret2030]

@Brad Thomas I own VICI and is the worst performing of the 3 you wrote about.

Kudo’s for picking a few of the best performing REIT’s in 2023!

If I only buy a couple of your winners each year I’ll do just fine.

[Humble_Modesty]

Recently jumped into EQR. Rental market is being underestimated for next several years. Well managed low leverage Reits don’t need 15-20% price appreciation to grow AFFO.

[Brad Thomas]

@Humble_Modesty Nice job. Thank you for reading & commenting. All the best

[mizesa]

A contrary opinion. Investing in REITs has been a winning formula - in the past. But is it still?

What was the winning formula? The Fed keeping rates at or near zero while printing $9T. INHV soared over 100% during that period.

But what is the formula now? The Fed is raising rates and doing QT. The results so far? INHV has dropped 30%. What about next year? The Fed says higher rates for longer. That means that the formula has changed for REITs. While one may wish for a return to the good old days ... one must also face the reality that those good old days are in the past and aren't likely to return soon.

What to do? INHV pays a paltry 2.98% dividend that could be cut at any time. There are very safe CDs and bonds that pay much more. Why not opt for those instead considering the current financial environment?

[Brad Thomas]

@mizesa As I just explained in my 2023 REIT Pick article:

REITs have performed remarkably well after periods of downturns After analyzing recessionary periods dating back to 1990, the best returns for REITs have been generated investing during the early cycle.

By understanding the leading and lagging behaviors of listed and private markets, real estate investors can tactically allocate at different times.

I’m in the process of completing the 2023 REIT Roadmap – an exclusive research report for members at iREIT on Alpha.

I Think You'll Be Impressed seekingalpha.com/...

Happy Holidays!

[GaryCal]

I agree with you. Brad's previous stock picks were horrible. SUMO off 70% comes to mind.. He now changed his focus to REITS. LOL

[mizesa]

@Brad Thomas Well I explained my position. The same position I outlined in January. Nothing has changed.

Have REITs performed remarkably well after periods of downturn? Of course! Because the Fed reversed course by lowering rates to zero while printing trillions. Sure if that again happens REITs should go up. Get in on the "early stage" if the Fed pivots.

However, now we are only in the middle of a Fed tightening and QT cycle - not the early stage. Therefore, I see no reason to rush to buy the REIT preferred shares on my shopping list. I will continue to wait patiently.

[Kyle Fishman]

Are you concerned that VICI is concentrated in Vegas (a desert area with water shortage problems)?

[Brad Thomas]

@Kyle Fishman Not at all... and that is one question I recently asked the CEO seekingalpha.com/...

Happy Holidays and thanks for reading and commenting

[oldguy42]

A question on EQR. Based on a price to AFFO of 23.65x. Is the AFFO dividend payout ratio very close to 100 percent? Seems a little high.

[Selective Stocker]

Brad, any thoughts on Florida’s P&C insurance premiums rising in many cases by well over 100% for many properties and how this could affect this investment? I’m not talking about state regulated rate increases which Florida insurance companies are also “justified” in pushing for.
This action was being initiated across the board by solvent companies on a large % of properties for renewals in 2021 well in advance of the hurricane.

I’m not talking about Rate increases requested but surging premiums within the current premium structure.

Thanks,

[Income4ever aka Cyclenut]

@Sarasota Stocks
Punta Gorda, just renewed mine , increased better coverage for only $400 more ... thats not unreasonable... Tower Hill

[Chart_Browser]

@Sarasota Stocks V.P. of the board in our community in PBC, FL and our insurance co. just advised us to allow ~35% more for insurance for our condo community.

[Road-runner]

@Sarasota Stocks Great question/thought. The property ins. Market in FL is an absolute mess.