Why are REITs down?

Understanding REITs in current market conditions. (VNQ) (VICI) (O)

Some of you may be asking yourselves, “Why are REITs performing poorly despite a strong housing market.” Well, there are actually multiple reasons. One reason is that the current “risk-free rate” which is typically measured by the return of short term treasuries or money market accounts is just over 5%. The reason this hurts REIT value is because most REITs have a dividend yield lower than 5% or just above 5%. For many investors it simply does not make sense to purchase a REIT and add downside risk. REIT dividends also do not count as “qualified dividends” which mean they will be taxed more. Another reason REITs have lost value in the short term is due to higher interest rates. Interest rates cause a headwind for REITs because they are highly levered companies. All of the new debt and variable-coupon debts that the REIT takes on or already has will be subject to much higher rates.

Now that we know the downside risk let’s talk about the potential pros of investing in REITs right now. For starter, the Vanguard Real Estate ETF (VNQ) is down nearly 40% since its peak in December, 2021. Using that same time frame the S&P 500 (SPY) is only down about 9.5%. 40% is a steep discount for an industry that can eventually use pricing power to rebalance the negative effects if higher interest rates. Another major pro to REITs is many of their track records for dividend increases. Their dividends are also safe because they are required to pay out 90%+ of their taxable profits in the form of dividends to their stockholders. Investors can also bank on getting the REIT dividend long after treasuries and money markets have begun to decrease their rates as long as the REIT remains profitable. Next, lets look at two REIT options available to us as investors. One is an industry stalwart that is considered more of a value investment, Realty Income (O). The other is considered a growth REIT that has been making waves in the world of REITs, Vici Properties Inc. (VICI).

Realty Income (O) is at the core of most REIT investors portfolio for a number of reasons. Since it was founded in 1969 Realty Income has had 640 straight monthly dividend payouts. Since going public they have increased their annual dividend for 30 years in a row. They pay their dividend monthly rather than quarterly which means money gets in the hand of investors even faster. Realty Income (O) operates in over 85 industries but their top industries include grocery stores (11.4%), convenient stores (10.6%), dollar stores (7.2%), no other industry makes up more than 6% of their portfolio. The main reason Realty Income (O) is on sale is because of the underperformance of two of their biggest clients Dollar General (DG) and Walgreens Boots Alliance (WBA) which each account for about 3.8% of rent. They are also catching a lot of flak from investors for branching out of their normal AAA rated investments into the casino industry. Realty Income (O) is beginning to look cheap enough to look past that though. One of the best indicators for finding good buy/sell points is a companies historical P/E ratio. This number will tell us how the market values the companies earnings. Realty Income (O) has a five year range of 29.12-75.35 (29.12 was during covid. Realty Income (O) current P/E ratio is 38 which is low when comparing it to the five year range. On top of all of that Realty Income (O) is currently sporting a whopping 6.14% yield.

Vici Properties Inc. (VICI) is considered one of the biggest up and comers in the REIT space. Vici Properties Inc. (VICI) is pretty much the exact opposite side of the spectrum. They invest mostly in gaming/casino facilities across the United States. Vici Properties Inc. (VICI) is growing faster than just about every other REIT out there. Take a look at Vici’s growth metric on seeking alpha. It does not take an MBA to see that those numbers are astronomical. Their 5 year dividend growth rate for example is 5,249%… industry average is 0.33%. Vici Properties Inc. (VICI) current dividend is 5.9% which is much higher than the risk-free rate. Another reason to take note of VICI is that they are specialized in a industry that Realty Income (O) is just now entering. If we follow the money of Realty Income (O) one of the largest REITs in the world it leads us right to Vici Properties Inc. (VICI).

I hope you all enjoyed this article. None of this is financial advice it is simply research that I have conducted on the REIT industry in my spare time! If you enjoyed the article please subscribe and share!