With the major exchanges flirting with or fully into bear market territory, investors are moving their funds around and many of the big-momentum stock names of the past couple of years are struggling mightily in 2022. A combination of rising interest rates and fears of a recession has made investors skeptical of many growth stories.
In this environment, real estate investment trusts (REITs) often hold up better than the erstwhile highfliers, given their steady dividend income. Some REITs get all of Wall Street's attention, but here are two REITs Wall Street is sleeping on that deserve a closer look.
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1. Realty Income is a Dividend Aristocrat that continues to perform
Realty Income (O 0.11%) is a classic dividend stock that works in almost every economic environment. During the depths of the COVID-19 crisis, it was one of the few REITs that hiked its dividend instead of cutting it. It has earned a place as a Dividend Aristocrat, a select group of S&P 500 companies that have increased their dividend payouts annually for at least 25 consecutive years.
Realty Income owns and operates single-tenant buildings and leases them out to high-quality tenants that are responsible for most of the expenses, including taxes, insurance, and maintenance. These are called triple-net leases. The typical tenant is a company with a defensive business model, which means they are less sensitive to the economic cycle. The ideal tenant for the REIT is a drugstore, convenience store, or dollar store.
Realty Income's stock price is down about 3.3% year to date, which is much better performance than the S&P 500 (down 16.5%). It has never been a flashy stock, although it performs well. Retirees might like the fact that the stock pays a monthly dividend. At current levels, it yields 4.2%. Realty Income is one of those stocks that should be a core holding of an income investor's portfolio.
2. Equity Residential is benefiting from soaring real estate prices
Equity Residential (EQR 0.88%) is a REIT that focuses on upscale apartments in some of the most attractive urban markets in the U.S.
The company has a certain market that it targets: one with strong job growth, particularly in the knowledge industries. The typical tenant is young and affluent, but not yet ready to move out to the suburbs. Its ideal market also has a shortage of single-family homes and has barriers to entry for new construction. These markets are characterized by rapidly rising real estate prices, which translates into higher rents.
The pandemic was difficult for the company: It was forced to buy occupancy, which means it offered concessions to tenants in order to keep them in their apartments. These below-market leases lasted through 2021 and have now mostly expired. Equity Residential was roughed up after its first-quarter earnings as funds from operations (FFO) came in below expectations.
Still, there were bright spots in the earnings report, as FFO per share rose 15% and the average value of new leases rose 15.3% when turned over to a new tenant. For leases issued in April (part of Q2), the value of the new leases was up 17.6% from the prior average.
The company is guiding for FFO per share to come in between $3.40 and $3.50, which gives the stock a multiple of 22 times FFO per share, which is a reasonable valuation for a REIT. Equity Residential also increased its quarterly dividend from $0.603 to $0.625 per share, which gives the stock a yield of 3.4%. Equity Residential is a good way to get income and exposure to the real estate market.
