Still , REITs also traded at a 10.79 % median discount to their net asset value ( NAV ), which is what their assets would fetch in a private transaction , according to S & P Global Market Intelligence . These securities are pricing in the expectation that there will be a soft landing for the economy and that the Federal Reserve will cut interest rates ( Fed Chairman Jerome Powell suggested in December that the Fed might at least be done hiking rates ).
Many industry observers expect REITs to continue posting positive stock returns in 2024 , aided by an uptick in earnings growth . UBS expects the 200-plus REITs it covers to grow earnings per share 3.7 % on average from 2023 to 2024 and to yield 4.0 %.
REITs essentially are a bet on the movement of interest rates . They rise in a lower rate environment and flounder
Essentially tax structures , REITs must pay out 90 % of their profit in dividends . So they ’ re a magnet for investors seeking steady dividend income .
when rates are high , as they did in 2022 . Essentially tax structures , REITs must pay out 90 % of their profit in dividends . So they ’ re a magnet for investors seeking steady dividend income .
Morningstar senior equity analyst Kevin Brown says all of the 19 REITs he covers “ are trading at a discount to fair value .” Those fair value estimates are based on the cash flows of the companies , which are forecast 10 years forward ; he then determines the terminal value of the overall ongoing enterprise value of those companies .
Brown expects REITs to generate “ solid positive performance ” over the next few years and for them to outperform the broader equity market if rates fall . He also notes many companies were performing well starting in early 2022 , and that drove their revenue growth and net operating income to historic levels as
they recovered from the pandemic .
But people who invested in REITs for the dividend yield rotated out of the sector when interest rates rose , since Treasurys became a less risky option . Many REITs are also Krazy Glued to interest rates because the business most times requires companies to load up on debt . Developing a project — whether it ’ s a skyscraper , office building or college campus — is expensive .
“ If interest rates stabilize and potentially go down , people may be able to recognize the value these companies have been able to produce in their portfolios over the past two years ,” Brown says .
The analyst also sees healthy growth prospects in the senior housing segment of the healthcare sector , and says he ’ s recommended companies such as Welltower and Ventas . Older Americans ’ spending on healthcare is driving housing demand for senior living facilities . After slumping 22.2 % in 2022 , the sector has since become relatively upbeat , bouncing back to a 13.9 % gain last year , according to the National Association of Real Estate Investment Trusts ( Nareit ). Healthcare names are trading at a slight 3.2 % premium to NAV .
“ Senior housing is more defensive than most other sectors ,” says Brown . “ The sector is all based on demographics .”
The target market for such housing , people above 80 years old , should grow 7 % annually by 2027 after growing at a 1.5 % pace in the previous decade , he says . After historically slower construction of these facilities during the pandemic , there ’ s now stronger demand , which could lift occupancy to more than 90 % by 2027 from about 83 % now .
Brown thinks rising occupancy and strong rental rate growth should produce solid revenue gains in this space . Those growth rates , combined with margin increases , should spur the compound average growth rate of 12 % for net operating income over the next 10 years .
Cohen & Steers ’ Serton expects REITs to post single-digit to low-double-digit returns in 2024 if real interest rates and REITs ’ credit spreads continue to contract amid higher net operating income growth .
54 | FINANCIAL ADVISOR MAGAZINE | JANUARY / FEBRUARY 2024 WWW . FA-MAG . COM