Dividend-paying Real Estate Investment Trusts (REIT) can make for a quality addition to a passive stocks investment portfolio.
Heading into 2023, there are macroeconomic headwinds to consider before making an investment case, predominantly the likelihood of hefty interest rate hikes and the associated cost of capital hitting REITs’ bottom lines.
However, a case could be made that REIT stocks are a bargain right now, and with the promise of high yields, they shouldn’t be written out of your portfolio just yet.
We taking a look at the lay of the REIT land in the UK and US.
The small and large of UK-based REITS
FTSE 250 constituent Supermarket Income REIT PLC (LSE:SUPR, OTC:SUPIF) (SUPR), which believe it or not deals in grocery chains across the UK, currently offers a 5.81% dividend yield on a 102.45p share price.
According to UBS’s latest global real estate valuation summary, UK REITs trade at an average price-to-earnings (P/E) ratio of 17.9 times when fairly estimated.
In comparison, SUPR has a trailing P/E ratio of 9 times.
Per Supermarket Income REIT’s most recent trading statement in October, the group deployed £579mln into 19 sites across the UK, primarily financed by two expanded and oversubscribed equity raises (netting £500mln) and the proceeds of new and existing secured and, post balance sheet, unsecured banking facilities.
No matter how shallow or deep the recession gets, supermarkets aren’t going anywhere, especially not the Sainsbury’s, Tesco and Morrison’s stores comprising the majority of Supermarkets’ portfolio.
Custodian Property Income REIT PLC's (LSE:CREI) diversified portfolio brings in an annual average dividend return of 5.93p per share, which is “always fully covered by earnings, supported by both a diverse, smaller regional property strategy and a conservative gearing policy,” according to its chair David Hunter.
The REIT's board expects to continue to pay quarterly dividends per share of 1.375p to achieve a target dividend per share for the year ending 31 March 2023 of no less than 5.5p, up from 5.25p last year.
Custodian shares are currently changing hands at 92.76p, close to 12% down year-on-year, commanding a yield of 5.9% against Supermarket Income REIT's’ 5.81%.
In the blue-chip space Land Securities Group PLC (LSE:LAND) (Landsec) and British Land Company PLC (LSE:BLND) have made advances on the London Stock Exchange in the past three months, but there could still be enough headroom to make an investment case.
With that in mind, both reported notable declines in accounting returns in their November statements.
Both are naturally high yielding in terms of dividends, although the loftier share prices should be taken into account when considering their investment potential.
In the US
Elevated cost of capital paired with a deeper-than-expected recession will weigh on US-based REIT stocks, according to Deutsche Bank’s 2023 outlook.
“We expect largely muted public REIT earnings power as the robust 2021/22 leasing momentum and sturdy to positive rent spreads wane given the macro backdrop,” said analysts at the bank.
Yet among the diversity of property subsectors, particularly industrial, sunbelt residential (referring to the high-growth south and southwest states) and hospitals are coming into focus.
Top picks according to Deutsche Bank include Prologis (PLD), Camden Property Trust (CPT) and Welltower Inc (WELL).
Prologis could be a particularly sanguine pick, given its focus on those asset types. After tumbling 30% last year, analysts reckon the REIT's stock is now in bargain territory.
Jefferies International analysts believe Prologis has grown “at one of the best rates in recent years”, yet at US$114 per share, the stock is down 27% year-on-year and is yet to trade at much of a premium to its contemporaries, despite outperforming on fundamentals.