Real estate investment trusts (REITs) are often pegged as being good hedges against inflation that also often move independently of the broader market. Right now, not so much.
These pools of income-producing property are down about 28% year to date compared to about 20% for the S&P 500, according to the MSCI US REIT Index. But that means a buying opportunity, too, for those inclined to sift through the 225 or so publicly traded REITs for trusts with promising portfolios that appear oversold.
To me, those include three that I currently hold: Digital Realty (DLR -0.22%), Alexandria Real Estate Equities (ARE 0.77%), and Terreno Realty (TRNO -0.11%). They're in different businesses -- data centers, life sciences properties, and warehouse space, respectively -- but they do share some characteristics, including an ongoing bear market battering.
This chart shows how badly these three stocks have been sold off since the first of the year.
Share price potential while enjoying dividend flow
REITs are required to pay at least 90% of their taxable income to shareholders, which means they don't usually have a lot of cash on hand and typically have to issue new stock or borrow money to finance expansion. Soaring interest rates and a down market make those options less palatable than usual right now, and each of these REITs face market concerns specific to their industries.
But they also share the potential for strong share price gain when the market arrows turn north. That's in no small part because they're each well-run companies with solid performance records built on portfolios that serve growing markets in their respective specialties.
Digital Realty, for instance, is one of the largest of all REITs and operates hundreds of large data centers around the world. Alexandria is a pioneer in life sciences office space and leases facilities to major biopharma companies and thousands of other operations at collaborative campuses around the country, and Terreno is a specialist in small warehouses that fill a critical role for their logistics clients in six major coastal markets.
They're also reliable providers of dividend income. This chart shows how consistently these three REITs have paid yields at levels exceeding the larger market, represented in this case by the Vanguard S&P 500 ETF:
FFO and dividend growth also point to buy consideration
Funds from operations (FFO) for each of these stocks also appear favorable. Digital Realty is projecting $6.75 to $6.85 per share for 2022 in that critical metric, down a bit from the $6.80 to $6.90 it guided as the year began. But with a payout ratio of a very modest 42% based on cash flow, this REIT appears ready to build on a record of 17 straight years of dividend increases.
Alexandria Real Estate Equities, meanwhile, has raised its dividend for 11 straight years and has a payout ratio of about 56% based on cash flow and its FFO performance, which the company recently guided upward by cents to a midpoint of $8.41 per share, should be easily sustainable.
Then there's Terreno, which has a trailing-12-month FFO-per-share of $2.94, the highest since the company went public in 2010. This REIT also has raised its dividend for 11 straight years and has a payout ratio of about 85% based on cash flow that's still comfortably within typical REIT ranges.
Target prices that point to "moderate buy" sentiment
Then there's what the analysts say. They give Digital Realty target prices ranging from $90 to $145 and a consensus of $145, which would be a 50% or so jump from the current share price of about $96.
For Terreno, make that $54 to $79 and a consensus of $67.90, a potential upside of about 28% from its current share price of about $53. Target prices for Alexandria Real Estate Equities, meanwhile, range from $140 to $186 with a consensus of $173.20, which would be a nice 30% gain from current levels of about $132 a share.
All three are rated "moderate buys," and that reflects my own sentiment. Given the moats around their business, solid demand for their space going forward, their ability to add to their holdings while raising rents at least somewhat, and their consistently growing flows of passive income, I'm down with moderate buys of these stocks, too, especially now that the bear market has taken such a bite out of their share prices.