Sweaty fighter gets punched in the face
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I love the real estate economy. But I'm not a landlord. Change your own light bulbs. Don't call me.
The advent of real estate investment trusts (REITs) has made it possible for people to earn landlord-like income from their computers and smartphones.
Why are these “virtual 4 property” trades available in convenient ticker format? Thank you, Congress (no joke!)! By law, a large portion of REITs' earnings must be returned to us, the shareholders, in the form of dividends. Even the average REIT ends up paying higher dividends than most other sectors, and some REIT dividends can be downright enormous, such as the 7.8% to 22.3% yielding REITs we'll discuss later.
While not perfectly linear, markets have surged this year, and as we approach the midpoint of 2024, the S&P 500 has already delivered double-digit returns.
Sure, artificial intelligence giants got a lot of credit, but the rising tide floats many boats. In fact, investors were buying in 10 of the market's 11 sectors as of June 24.
The only exception? Real estate.
XLRE meme
Contrarian outlook
Blame it on the Federal Reserve.
Rising interest rates make borrowing more expensive, which puts a strain on many types of businesses, but arguably the ones most affected are REITs.
Real estate took a big hit when the Federal Reserve began raising interest rates in early 2022, a hit that continued until several months after the Fed's final rate hike in July 2023. The real estate sector began to recover near the end of last year, and while all experts were predicting a concerted rate hike throughout 2024, the Fed did not deliver. The target range for the federal funds rate remains at 5.25% to 5.50%, with expectations of no more than one or two rate cuts this year.
This is great news for contrarian investors who still have cash to put to work. We want to buy before the Fed finally triggers a REIT stampede, not after.
So let's take a look at some potential investment opportunities waiting to rise: As of this writing, these five REITs have an average yield of 11.4% and should eventually benefit from lower interest rates.
We'll start with Highwoods Properties (HIW, 7.8% yield), an office REIT that operates primarily in Southern and Southeast markets, including Atlanta, Charlotte, Dallas, Nashville and Orlando.
COVID-19 hit nearly every sector of the market a few years back, but few industries were hit as hard or long as office real estate. While conditions have improved for these businesses as employers pursue return-to-office (RTO) policies, metrics like security card swipes and subway ridership remain down 30-50% from pre-pandemic peaks in many cities.
But when I saw HIW for the last time just before the end of 2023, I said, “This is it.
“But the opportunity is that many of these tenants are simultaneously upgrading to higher quality (and more expensive) properties, which bodes well for HIW. HIW is generally a good operator, and its cash, FFO and other key metrics have been trending broadly in the right direction for over a decade.”
Apparently, the market agrees.
The rise in Highwoods stock isn't the result of one single factor, but rather a confluence of small factors working in HIW's favor. In November 2023, the company issued $350 million in bonds, allowing it to push out the maturity of some debt to 2026, avoiding a headache that still plagues its peers (shorter maturities). Leasing activity is strong. Financial performance is also broadly in line with expectations, and the stock's large discount from the second half of 2023 is narrowing.
Highwoods continues to struggle with the broader trends in the office industry. High interest rates aren't helping, but they're not likely to be as much of a drag on HIW as their less capitalized peers. At least for now, the dividend seems well covered. While not run by a fanatical businessman, Highwoods at least seems more stable than its competitors.
Gladstone Commercial (High Quality, 8.7% yield) is another REIT that's struggling with its exposure to the office sector, but its exposure to other markets has protected it from further declines.
Gladstone Commercial is part of the Gladstone Group, a REIT and business development company (BDC) that also includes Gladstone Land (LAND), Gladstone Investment (GAIN) and Gladstone Capital (GLAD). The company owns 132 single-tenant and anchor multi-tenant net-leased industrial and office properties in 27 states. Over the past few years, a roughly 40% allocation to office properties has weighed on the stock's value and also forced the company to cut its monthly dividend by 20% to 10 cents per share in 2023.
GOOD is also certain to be profitable in 2024, but I'm not hugely excited. Gladstone is moving in the right direction; it has disposed of a few vacant office properties, raising its office exposure to 36%. But these disposals are only a small part of the portfolio, and it's not very acquisitive, so its asset mix is unlikely to change significantly anytime soon. Combine all this with a fair valuation and there's very little to get excited about.
Outfront Media (OUT, 8.7% yield) is proof that you can invest in any real estate you can think of. Specifically, Outfront allows advertisers to get a cut of wherever they want to place their ads: billboards, transit stations, vehicles, and even “mobile assets” (mobile ad campaigns that engage with customers inside a store or walking through a particular area).
Outfront is enjoying an upswing in transportation, one of the weakest sectors post-COVID-19: ridership for subway systems like the MTA and WMATA plummeted after the start of the pandemic, but their results continue to rise because of RTO policies.
Still, things are far from perfect: Outfront continues to struggle with declining revenue from national media and rising costs for signage, advertisements and maintenance.
Outfront is a well-positioned stock that needs a boost. It trades at just 8 times estimated adjusted operating cash flow (AFFO), and with a yield of almost 9%, it's safe enough at just 70% of AFFO. But the stock hasn't completely recovered from its doldrums.
Global Medical REIT (GMRE, 9.5% yield) is an owner of off-campus medical offices and post-acute inpatient medical facilities. The company currently owns 185 buildings and leases them to 268 tenants, with an occupancy rate of over 96%.
GMRE likely hit bottom in late 2022 after one of its tenants, Pipeline Health System, filed for Chapter 11 bankruptcy. Either way, GMRE has been on a roller coaster ride to nowhere, still losing roughly a quarter in value over the past three years with plenty of peaks and valleys.
Global Medical REIT is in fact facing bankruptcy again, this time from tenant Steward Health Care, which operates 31 hospitals and a physician group. Unlike Pipeline, however, the impact here should be minimal: Of the six properties Steward leased from GMRE, only one was substantial (<3% annualized base rent).
That said, GMRE has gone on the offensive and acquired the 15-property portfolio for approximately $81 million, although, interestingly, the company has yet to determine exactly how it will finance the deal.
While a yield of over 9% is attractive, Global Medical's dividend of 21 cents per share is a little too close to AFFO forecasts for comfort.
The highest yield goes to Uniti Group (UNIT, yielding 22.4%), a top 10 fiber provider in the United States, boasting more than 141,000 fiber route miles and more than 8.5 million strand miles of fiber, connecting 300 metropolitan markets and providing high-speed network services to more than 28,000 customers.
This is similar to telecommunications infrastructure names such as American Tower (AMT) and Crown Castle (CCI).
Uniti's infrastructure effectively powers basic necessities at this point, which is great for maintaining the status quo, but has done absolutely nothing to impact growth since Windstream spun Uniti off in 2015.
Things weren't going much better for Windstream, either: The company filed for bankruptcy in 2019 and emerged from it a year later.
But now they'll have a chance to recover together.
In early May, Unity announced a merger with the now privately held Windstream, in a deal expected to close in late 2025. Reuters reports that “the proposed deal would offer Windstream shareholders $425 million in cash, $575 million in preferred stock and a 38% stake in the combined company. Unity shareholders would own the rest.”
However, Wall Street wasn't too thrilled about the deal, with shares dropping 37% in the two days following the announcement.
It's no wonder: A common expectation from Fitch Ratings, S&P Global Ratings and others is that Unity will “post-REIT” once the merger is complete and will stop paying its dividend.
Brett Owens is the Chief Investment Strategist at Contrarian Outlook. For even more great income ideas, get your free copy of his latest special report, “The Early Retirement Portfolio: Massive Dividends Every Month, Forever.”
Disclosure: None