The market has taken a merciless beating in 2022. Real estate investment trusts (REITs), which are typically considered to be somewhat safe havens, have not escaped the pounding. Indeed, the S&P U.S. REIT Index is down about 23% so far this year, a stunning turnaround from 2021 when the index saw a dramatic gain of nearly 40%.
But there are a couple of exceptions which are worth looking at: Sabra Health Care REIT (SBRA -0.58%) and W.P. Carey (WPC 0.27%). As the chart below shows, each of these stocks are pretty much holding their own so far this year in both price and total return, especially compared with the Vanguard Real Estate ETF, a widely used proxy for the sector which holds about 160 REITs at any given time.
So, what's happening here? And might it keep happening? Let's take a look at each to find out.
1. W. P. Carey
W.P. Carey is a diversified REIT, and it's one of the largest net-lease REITs out there as well, with asset management teams in the U.S. and Europe overseeing 1,336 properties containing 157 million square feet of building space that's nearly 99% occupied.
About 63% of its business is in the United States and 35% in Europe. Its list of 356 tenants is fairly evenly split by sector: industrial, office, and retail, with a smaller dose of self-storage mixed in, giving this portfolio both geographic and market diversification.
W.P. Carey's business relies on single-tenant, long-term leases, of which 99% have rent escalation clauses. The REIT also works in sales-leasebacks, build-to-suits, and the purchase of existing, leased properties. The company has already committed about $400 million to capital expansion this year and grew earnings per share by nearly 24% in the past quarter.
Also, W.P. Carey has raised its dividend for 26 straight years and is currently yielding about 5.1% at a share price of about $82.40, which gives it a very reasonable price/funds from operations ratio of about 14 times and a payout ratio of a sustainable 83% based on cashflow.
2. Sabra Health Care REIT
Sabra has an investment portfolio of 416 properties containing 41,445 beds and units across the United States and Canada. They include 279 skilled nursing facilities, 109 senior housing communities, and the rest a mix of behavioral health centers and other specialty hospitals.
This industry was hit hard by the pandemic, with operators losing occupancy to death and people just avoiding those settings when they could. Those companies shared their pain with their landlords, including REITs like Sabra, which cut its own dividend by 33% in mid-2020.
Since then, though, the dividend has stayed steady, and things are getting better. Revenue growth in the first quarter was up 18% year over year, occupancy is on the rise, the rent's getting paid, and the company said in its latest earnings report that it doesn't expect any more "material lease restructurings."
Sabra also is investing in future growth, including in six properties being converted into addiction treatment centers with negotiations for more such projects underway. They also just closed on the $237 million purchase of 11 senior housing properties in Canada, furthering its commitment to serving this growing, aging population.
Sabra hasn't raised its dividend in quite some time but still maintains a yield that at nearly 9% now is almost three times that of the Vanguard Real Estate ETF and more than five times that of the S&P 500 with a payout ratio of a reasonable 80% based on this year's earnings estimates.
Going forward, growing revenue from more sources should put this provider in a position to bump up that payout even more, making it an attractive choice for an income stock. The market apparently thinks so, given this equity's recent performance.
These REITs show resilience and are poised to share more rewards
Sabra Health Care REIT and W.P. Carey each reacted to opportunity and challenge in their own way during the worst of the pandemic -- Sabra through damage control in its portfolio and W.P. Carey by recognizing early the opportunity to scoop up industrial properties.
As evidenced by their share price performance, the market apparently recognizes that positive financials and savvy management at these two companies point toward continuing resilience in this down market and the inclination to ramp up shareholder return when the time is right. I tend to agree and plan to invest in each of these stocks soon, too.
