The past year has been a tough one for real estate investment trusts (REITs), with total returns (price + dividends) for the equity REIT sector outpacing the broader S&P 500. But double-digit declines over the last year could set the stage for some of the best REITs to rally in 2023.
Investment managers specializing in REIT stocks (opens in new tab) anticipate macro-conditions will remain challenging in the new year due to high interest rates, inflation and recession fears. Still, it's important to note that operating performances remain strong, creating the catalyst for a REIT recovery next year as fears abate and more certainty returns to capital markets.
REITs are likely to generate attractive income growth next year if the Federal Reserve can tame inflation and avoid a deep recession. Assuming this scenario, real estate investment trusts would be able to capitalize on the demand for leasing space that exceeds new supply, which has been constrained by steeply rising material and labor costs. This supply-demand imbalance will give REITs strong rental pricing power for many property types.
Investment managers also think that the best REITs to buy in the coming year are those continuing to benefit from secular tailwinds. These include self-storage, apartment, alternative housing, cell tower and industrial space operators. Net-lease REITs are also attractive because of their long-term leases that generate durable cash flows in every economic climate.
With this in mind, here are the nine best REITs to buy (and hold) in 2023.
The names featured here all have strong defensive characteristics and exceptional pricing power. They are well-prepared for rising interest rates thanks to their effective cost controls and balance sheet management.
What's more, these are some of the best dividend stocks, with payouts that are well-covered by FFO (funds from operations, a key REIT earnings metric). Many of these names have generated a decade or more of steady dividend growth, while others are prepping for big 2023 dividend hikes.
- Market value: $18.1 billion
- Dividend yield: 2.4%
Sun Communities (SUI (opens in new tab), $143.15) is America's leading owner/operator of manufactured housing, recreational vehicle (RV) parks and marinas. SUI's existing portfolio is made up of 352 manufactured housing communities, 179 RV parks and 131 marinas. Additionally, the REIT boasts a strong development pipeline consisting of 9,000 manufactured housing sites and 7,000 RV sites (opens in new tab). Sun Communities' portfolio occupancy levels are 97.1% in North America and 91.7% in the U.K., where it owns 55 RV holiday parks.
SUI is on this list of the best REITs to buy in 2023 because it benefits from compelling supply-demand fundamentals for manufactured housing. Sun Communities received approximately 43,000 applications for sites in its housing communities this year. Manufactured housing is popular due to its ability to provide 25% more space than a typical multifamily rental at 54% lower costs per square foot.
The supply of manufactured housing is constrained, but Sun Communities has been able to leverage its land portfolio to add 11,800 expansion and development sites since 2012. Supply-demand fundamentals are also compelling in the RV park sector. Approximately 9.5 million Americans plan to purchase an RV over the next five years and there are only about one million RV sites available nationwide for an estimated 11 million RV owners.
Once tenants join a Sun community, they rarely leave. Move-outs are less than 0.5% annually, while the average tenure for the REIT's manufacturing housing tenants is 14 years. RV park residents average eight-year tenures.
Accretive acquisitions helped the REIT deliver 28.4% core FFO per share gains during the September quarter and boost its full-year FFO guidance.
Over the past decade, SUI has generated 9.2% core FFO per share growth, significantly outperforming the major REIT and broad-market indexes. Dividend growth has averaged 5.5% annually over five years and the payout is exceptionally conservative for a REIT at 47% of FFO.
- Market value: $109.5 billion
- Dividend yield: 2.6%
Not many REITs have attracted analyst upgrades recently, but Prologis (PLD (opens in new tab), $118.59) is one of them. Scotiabank (opens in new tab) analyst Nick Yulico upgraded PLD to Outperform (Buy) from Sector Perform (Neutral), citing the company's compelling embedded rent growth, solid balance sheet and dominant real estate platform.
Prologis owns logistics real estate across the U.S., Europe and Asia; roughly 2.5% of global GDP flows through its distribution centers. Its portfolio is made up of warehouses representing 1.2 billion square feet of space leased to over 6,300 customers and is valued at $188 billion. Its customers are major logistics players like United Parcel Service (UPS (opens in new tab)) and DHL and e-commerce merchants like Amazon.com (AMZN (opens in new tab)) and Walmart (WMT (opens in new tab)). In addition to its existing facilities, the REIT owns a development-ready land portfolio that could add another 227 million square feet of new leasing space.
PLD is one of the best REITs to buy given its exceptional track record for creating value for investors. It does this in part through development activities and has generated over $11 billion of new value from $40 billion invested since 2001. Third-party facility management is another growth engine for the REIT. Earnings related to this business have risen 22% annually over five years.
The company's core FFO per share and dividend growth have exceeded REIT peer levels and the S&P 500 over the last three and five years. What's more, PLD's A credit rating and $12.7 billion of new investment capacity should fuel steady future growth.
Prologis has hiked dividends 11.5% annually over five years and keeps payout low at 56% of FFO. This points to an exceptionally secure and rising dividend.
- Market value: $52.6 billion
- Dividend yield: 2.7%
Self-storage is the REIT world's most recession-resistant segment; other real estate suffered 25%-67% net losses during the Great Recession, but the self-storage segment grew profits 5%.
Public Storage (PSA (opens in new tab), $298.81) is the market leader in self-storage. The REIT has top market shares in 14 of the 15 largest U.S. markets and more than twice as many locations as its next largest competitor. It has interests in over 2,800 facilities and approximately 200 million square feet of rentable space and a presence in 40 U.S. states. Its top markets (Los Angeles, San Francisco, Miami, New York and Seattle) contribute approximately 40% of revenues.
The REIT has been aggressively building its franchise. Since 2019, Public Storage has expanded its portfolio by 23% and made over $7.4 billion of new investments. Profits have not taken a backseat to growth. PSA has achieved steady expansion in operating margins, which have grown through digital initiatives and reduced payroll and utility costs. As such, the company has emerged as the profit leader in the self-storage industry.
The REIT's September quarter FFO per share rose 20.8% year-over-year, easily beating analysts' consensus analyst estimate. Public Storage also raised its full-year FFO outlook. All of the company's major markets posted double-digit rent growth, with particular strength in the Los Angeles and Miami markets, which were up 22% and 25%, respectively.
Public Storage has an A2 credit rating and one of the best balance sheets in the REIT industry. While dividend growth has been a lower priority than portfolio expansion and debt reduction, the REIT recently rewarded its investors with a $13.15 per share special dividend. Comments from management indicate plans to resume dividend growth in 2023 and beyond.
With operating cash flow exceeding $2.4 billion so far this year, total liquidity exceeding $1.0 billion and payout from FFO currently at 52%, Public Storage has plenty of dry powder to support dividend growth.
- Market value: $101.6 billion
- Dividend yield: 2.9%
One of the best inflation hedges is a dividend rising faster than the consumer price index (CPI) (opens in new tab). Cell tower REIT American Tower (AMT (opens in new tab), $218.22) has done just that. This REIT's dividends have increased 20% annually since 2012, and analysts forecast 18% annual growth through 2025. AMT's dividend is also well covered, with FFO payout ranging around just 64%.
Over the past decade, AMT has generated robust gains in revenues (up 14.2% annually), adjusted EBITDA (up 14.1% per year) and adjusted FFO per share (rising 13.8% annually).
American Tower boasts a large, geographically diverse portfolio consisting of more than 223,000 cell tower sites across six continents. The company is a major beneficiary of 5G investments by major wireless carriers that lease space on the REIT's cell towers to build out their networks. Adding new tenants to current cell towers is extremely profitable for the company. Returns jump from 3% at one tenant per tower to 13% for two tenants and 24% for three tenants.
Last year's acquisition of data center REIT Coresite strengthened AMT's competitive position by enabling the company to offer its tenants a more vertically integrated infrastructure capable of supporting next-generation 5G networks.
American Tower maintains an investment-grade balance sheet and has substantially trimmed its debt since acquiring Coresite. The company ended the September quarter with $2.1 billion of cash, $7 billion of total liquidity and floating interest rates reduced from 31% to 20% of debt.
The REIT's September quarter property revenues rose 10.2%, net income was up 12.9% and adjusted EBITDA was up 5.8%. However, adjusted FFO per share was down slightly due to tough comparisons to last year's September quarter when the company received a large non-recurring advance payment from a customer. American Tower is guiding for 6% gains in adjusted FFO this year.
AMT shares are typically pricey but are currently trading at 22 times adjusted FFO. This is well below the stock's five-year average price multiple of 26 times the adjusted FFO.
Alexandria Real Estate Equities
- Market value: $24.7 billion
- Dividend yield: 3.2%
Alexandria Real Estate (ARE (opens in new tab), $150.39) is a life science REIT specializing in science, agricultural technology and technology office space located in the innovation centers of greater Boston, the San Francisco Bay area, New York, San Diego, Seattle and the Carolina Research Triangle.
The REIT's 1,000+ tenants consist of major global pharmaceutical and biotech companies, academic and government labs and life science device makers, all of which are recession-resistant. Alexandria Real Estate's portfolio consists of 41.1 million square feet of existing properties, 15.5 million square feet of near-term construction and development properties underway, and 17.9 million square feet of future development projects. Over the next few quarters, ARE expects to add $645 million to net operating income from newly leased properties.
Robust demand for the REIT's life science properties is evidenced by 1.7 million square feet of new leasing activity during the September quarter, 87% of which was generated from existing tenants. ARE also posted same property net income growth of 10.6%, which was the third-highest quarter in the company's history.
Alexandria Real Estate grew FFO per share by 9.2% during the September quarter, helped by new leasing activity, easily beating analysts' consensus estimate. The company also tightened its full-year FFO guidance at the upper end of the previous range.
We're not alone in our outlook that Alexandria Real Estate is one of the best REITs to buy in the new year. Investment bank UBS (opens in new tab) has ARE as one of its top stock ideas for 2023, citing the REIT's strong balance sheet, well-covered dividend and best-in-class properties as factors.
Alexandria Real Estate is certainly not the cheapest REIT out there, currently trading at 23 times forward adjusted FFO. Still, ARE's dividend payout from FFO looks ultra-safe at 56% and dividend growth is attractive at 6.6% annually over five years.
Essex Property Trust
- Market value: $14.6 billion
- Dividend yield: 4.0%
Shares of apartment REIT Essex Property Trust (ESS (opens in new tab), $218.26) have taken a major beating this year, down nearly 40% year-to-date amid fears that a Silicon Valley employee exodus – not to mention massive tech layoffs – will hurt the REIT's primarily California Coast and Seattle-centric portfolio.
However, despite recent departures by some tech firms, the West Coast markets served by Essex Property Trust don't appear to be in jeopardy and continue to show above-average employment growth, higher-than-average household incomes and severely constrained housing supply. The REIT also continues to post 96% portfolio occupancy and steady double-digit same-property revenue growth.
ESS owns 253 apartment communities comprising 62,000 apartment units spread across eight major West Coast markets. The portfolio breakdown is 42% Southern California (Los Angeles, Orange County and San Diego), 40% Northern California (Oakland, Santa Clara and San Mateo) and 18% Seattle.
Thanks to its focus on profitable West Coast markets, Essex Property Trust has been able to produce core FFO per share growth twice the REIT industry average since 2007 and far superior dividend growth.
In addition, Essex Property Trust is poised to benefit from a new Google campus under construction (opens in new tab) in downtown San Jose that will create approximately 25,000 new jobs. The REIT has 10,000 apartment units located near the new campus.
Essex Property Trust's September quarter core FFO per share rose 18.3% and full-year FFO guidance looks for 15.9% growth at the midpoint.
In September, ESS shares were featured on Bank of America's list of stocks offering above-market and secure dividends. The REIT is a Dividend Aristocrat that has delivered 28 consecutive years of dividend growth. Over the past five years, Essex has grown its dividend by around 5% each year, on average, and payout is conservative at 60% of FFO.
Because of the brutal 2022 selloff, investors have the chance to pick up one of the best REITs for 2023 at a major discount. The stock currently trades at just 15 times forward adjusted FFO. This is the lowest FFO multiple the stock has seen since 2009.
- Market value: $6.1 billion
- Dividend yield: 4.3%
STAG Industrial (STAG (opens in new tab), $33.37) is a pure-play industrial warehouse REIT and a major beneficiary of e-commerce growth. Approximately 40% of its portfolio is e-commerce-related. As a percentage of U.S. retail sales, e-commerce has grown from roughly 6% seven years ago to 14.5% today and e-commerce penetration is expected to hit 30% by 2030.
STAG Industrial owns 563 warehouse properties encompassing 111.6 million square feet of leasing space across 41 states. Its tenants are primarily large, sophisticated public companies. Nearly 60% of its tenants are businesses generating more than $1 billion in annual revenues. While Amazon is STAG's single-largest tenant, accounting for 3% of annual rents, the portfolio is well-diversified both by geography, tenant and lease terms. Its holdings span more than 60 markets and more than 45 industries.
The REIT's cash flows are reliable, with less than one-quarter of its leases expiring through 2024. The $1 trillion U.S. industrial real estate market also provides STAG Industrial with plenty of growth opportunities. The REIT's acquisition pipeline is valued at $2.7 billion, but STAG is very selective in what it acquires. Last year, just 5% of the transactions in the REIT's pipeline met its due diligence standards and were acquired.
During the September quarter, STAG grew core FFO per share by 7.5% and maintained a 98.2% portfolio occupancy rate. The REIT doesn't provide FFO guidance, but analysts' estimates look for 7% gains, on average, this year. STAG Industrial has delivered three consecutive quarters of FFO beats, suggesting analyst estimates may prove conservative.
In addition to being one of the best REITs to buy, STAG is also one of the best monthly dividend stocks and has hiked payments every year since 2011. Dividend growth has been modest at just 0.8% annually over five years, but management has shared plans to grow future dividends in line with CAD (cash available for distribution). Boosting the dividend in line with CAD would suggest 4% annual hikes in the future.
STAG shares are down a remarkable 30% year-to-date in 2022 to trade at just 15 times FFO.
National Retail Properties
- Market value: $8.3 billion
- Dividend yield: 4.8%
Investors who have "stocks with reliably growing dividends" on their Christmas list should consider shares of National Retail Properties (NNN (opens in new tab), $46.21), which has delivered 33 consecutive dividend increases. This REIT invests in single-tenant, net-leased retail properties. It owns 3,349 properties encompassing 34.3 million square feet of leasing space, with assets valued at $9.4 billion.
National Retail Properties manages a well-diversified, recession-resistant portfolio consisting of convenience stores (16.7% of the portfolio), automotive service locations (13.6%), and full and limited-service restaurants (18.4%) such as Taco Bell, Wendy's and Denny's. Its sites are leased to roughly 380 tenants nationwide.
The REIT's leases provide reliable cash flow secured by average remaining lease terms of 10.4 years. Additionally, NNN's portfolio has a 99.4% occupancy rate. National Retail Properties also offers an investment-grade balance sheet, no significant debt maturities before 2024 and great liquidity with over $1 billion of borrowing capacity available. The dividend payout is maintained at a conservative 67% of adjusted FFO.
It's not only reliable dividends that make NNN one of the best REITs to buy in 2023. National Retail Properties has generated respectable 4.3% annual gains in core FFO since 2016 and annual shareholder returns averaging 11.5% over 30 years.
The REIT's September quarter results beat consensus analyst estimates, with core FFO per share up 9.9%. National Retail Properties also showed commitment to growth by hiking its full-year FFO guidance for the fourth time this year. Acquisitions and high occupancy and rent collection performances bolstered financial results.
NNN shares appear reasonably priced, trading at 14 times forward adjusted FFO – a nearly 6% discount to similar real estate stocks.
- Market value: $16.8 billion
- Dividend yield: 5.3%
With an enterprise value of approximately $22 billion, W.P. Carey (WPC (opens in new tab), $80.68) ranks as one of the world's largest net-lease REITs. WPC invests in single-tenant, net lease industrial, warehouse, office, retail and self-storage properties that have long-term net leases and built-in rent escalators. The REIT's assets are located in the US and Europe.
At present, W.P. Carey's portfolio consists of 1,428 properties leased to 391 tenants, Encompassing 174.9 million square feet of leasing space. The portfolio breakdown by property type is dominated by industrial (26%) and warehouse (24%), with smaller concentrations of office (18%), retail (16%) and self-storage (5%). Top tenants include U-Haul, the Spanish government, German retailer Hellweg and Extra Space Storage (EXR).
WPC's portfolio boasts a 98.9% occupancy rate and a weighted average remaining lease term of 10.9 years. Approximately 55% of the REIT's leases have contractual rent escalators linked to CPI and another 40% of leases have fixed escalators.
Helped by five consecutive quarters of same-store rent growth, W.P. Carey delivered 9.7% FFO per share gains during the September quarter and increased full-year FFO guidance. After closing an acquisition that adds over $2 billion of new self-storage real estate assets, the REIT ended the September quarter with $2.2 billion of liquidity and a ratings upgrade by Moody's.
W.P. Carey is another of the best REITs to buy for reliable dividend growth. The company has increased its dividend every year since going public in 1998 and has maintained a stable payout since converting to a REIT in 2012. Payout from adjusted FFO currently ranges around 80%.
WPC is currently valued at roughly 15 times forward adjusted FFO, a slight discount to its industry peers. Plus, its dividend yield of 5.4% is well above the median REIT yield of 4.7%.
Lisa currently serves as an equity research analyst for Singular Research covering small-cap healthcare, medical device and broadcast media stocks.
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