Real Estate Investment Trusts (REITs) have taken a hammering in the past year due to 2022's bear market. Many investors correlate REITs to tangible property; however, in reality, REITs hold a stronger correlation to stocks and bonds than private property. Therefore, most REITs lost market value alongside stocks and bonds in 2022 and the early months of 2023.
The good news is that many of the top REITs now seem oversold, allowing investors to secure value and lock in lucrative dividend yields. As such, I decided to search the market for REITs that I believe host attractive prospects for long-term investors.
U.S.-based REITs are required to distribute at least 90% of their annual profits to shareholders as dividends. Moreover, U.S. REITs are pardoned from income tax due to their high shareholder pass-throughs, preventing their investors from incurring double taxation.
In essence, REITs are high dividend-paying stocks with tax breaks. Although they are correlated to stocks and bonds, the correlations are not exact; therefore, REITs still present investors with diversification benefits.
After screening for attractive value and dividend characteristics, here are two of my favorite REITs to play the current market environment.
Brandywine Realty Trust
Brandywine Realty Trust (BDN, Financial) is a general REIT that invests across the board with exposure to residential properties, office buildings and other non-core assets such as life science facilities. Brandywine forecasts that it could achieve a cash flow yield of 5.4% to 7.2% in 2023 at a loan-to-value ratio of merely 40%, indicating that its shareholders will likely benefit from steady value accumulation.
A short-term analysis of Brandywine shows that its portfolio is on firm grounds. Although the economy took a turn for the worst in the past year, Brandywine managed to outperform its fourth-quarter earnings estimates by 11 cents per share while also producing $128.98 million in revenue at a 2.75% year-over-year growth rate.
In my view, much of the company's latest success stemmed from higher interest rates, which stimulated demand within the residential rental market. On the other side of the playing field, Brandywine's office endeavors are longer-term solutions, and the segment's occupancy rate of 89% with average lease terms of seven years implies that it possesses sustainable demand, which hedges against Brandywine's cyclical residential real estate risk.
Furthermore, Brandywine's total return metrics are in good shape. For instance, the REIT's price-to-funds-from-operation ratio of 4.03 ranks better than 91.20% of its peers. In addition, the REIT boasts an impressive forward dividend yield of 17.72%.
Kimco Realty Corporation
Kimco Realty Corporation (KIM, Financial) is a retail-driven REIT operating a gross lease program with more than 520 properties in its portfolio. Although Kimco's gross lease agreements prohibit it from avoiding sustaining costs, its robust market position allows it to attract high base rents and a percentage of tenant sales agreements. Therefore, the REIT stands out as a strategic play with tremendous value accumulation prospects.
In its latest earnings report, Kimco reported a total occupancy rate of 95.7% and core-anchor occupancy of 98%. The latter refers to its flagship tenants, which it utilizes to lure in smaller leasees at significant premiums. Furthermore, Kimco reported 1.9% year-over-year growth in same-property net operating income, accompanied by a scintillating 30.4% cash rent spread on new spaces.
Another salient feature of the company's latest earnings report is the proportionate sale of Albertsons Companies (ACI, Financial) shares, which deliver $301.1 million in dry powder. Selling Albertsons stock frees up capital for Kimco, allowing it to increase its tangible asset base in the coming quarters.
A closer look at Kimco's income statement shows that its revenue surged by approximately 26.7% in its latest fiscal period. However, the REIT's gross lease model meant that it suffered from rising inflation, which diluted its funds from operations per share by roughly 2.56%. Kimco's funds and adjusted funds from operation could proliferate in the coming quarters as inflation may have reached an inflection point, allowing the REIT to curtail its operating expenses.
Source: Kimco
Kimco's valuation metrics are not the best, but they're not in bad shape either. The REIT's price-to-funds-from-operations ratio of 12.94 is about average for the industry, and the price-to-tangible-book-value ratio of 1.24 implies that the REIT is fairly valued.
Kimco provides its investors with a forward dividend yield of 4.2%, which is much lower than Brandywine's dividend. However, a cash ratio of 3.49 indicates that Kimco is suitable for investors seeking sustainable dividends that are not in danger of being cut. In my opinion, Kimco fits into a dividend growth strategy as its fundamentals will likely lead to a series of long-term dividend increases.
Final word
Many REITs are looking oversold after 2022's bear market, allowing investors to secure for lucrative dividend yields and capitalize on value.
Brandywine Realty Trust and Kimco Realty Corporation provide investors with two excellent long-term investment opportunities in my opinion. The prior invests in mixed real estate, while the latter specializes in retail properties.
Although both REITs possess risks, their fundamentals are robust, and history shows that they reward their shareholders accordingly.
