Last year was the worst year for publicly traded real estate investment trusts, or REITs, since 2008, as was recently pointed out in an article on WealthManagement. The FTSE All Equity REIT Index lost a quarter of its value last year compared with a 40% drop during 2008.
However, the article also notes that several real estate fund managers believe 2023 will be a good year for the sector because many REITs have already been priced for a recession. In addition, REITs had reasonably good balance sheets heading into the new year.
“In 2023, we think the word is going to be ‘resilience,’” said John Worth, Nareit executive vice president for research and investor outreach. “In the face of an uncertain economy and rising rates, REITs are well prepared. They have built balance sheets that can weather higher rates.”
Contrarian investors can find plenty of opportunities in the sector. Here are seven REITs that should be big winners in 2023
|FR||First Industrial Realty Trust||$52.21|
|HST||Host Hotels & Resorts||$18.25|
|MAA||Mid-America Apartment Communities||$162.41|
|SPG||Simon Property Group||$125.19|
REITs to Buy: Public Storage (PSA)
Anyone who has owned a home is probably familiar with Public Storage (NYSE:PSA), the “world’s largest owner, operator and developer of self-storage facilities.” It boasts more than 2,900 facilities across the United States that serve more than 2 million customers.
Founded in 1972, Public Storage and its self-storage REIT, Storage Equities Inc., were merged into a single REIT in 1995. In 2006, the REIT acquired Shurgard Storage Centers for $5.5 billion, giving it a foothold in Europe with 141 locations there. Since the beginning of 2019, Public Storage has spent $8 billion to expand its portfolio by 26%, adding an additional 42 million square feet of space.
In the 12 months that ended Sept. 30, the REIT had $4 billion in revenue and $3 billion in net operating income. The REIT’s net debt and preferred equity are 3.3x earnings before interest, taxes, depreciation and amortization. Its long-term target is between 4x and 5x EBITDA.
PSA appears more than ready to handle anything that happens in 2023.
First Industrial Realty Trust (FR)
First Industrial Realty Trust (NYSE:FR) is an industrial real estate owner, operator and developer. At the time it went public in 1994, it had 226 industrial properties with 17.4 million square feet of gross leasable space across nine cities. Today, it owns or has under development 68.4 million square feet of industrial space across 439 properties. And it serves nearly 1,000 customers.
Over its nearly three-decade history, it’s developed over 80.3 million square feet. It focuses on bulk and regional distribution centers that enable its customers to meet their supply chain needs. While there are concerns about a recession weighing on consumer spending, e-commerce is trending in the right direction.
In October, First Industrial Realty Trust reported excellent Q3 results. Highlights included a 98.3% occupancy rate and a nearly 31% increase in cash rental rates. Management also increased its 2022 funds from operations guidance to between $2.21 and $2.25 a share. Finally, the REIT began a three-building, 1.8 million-square-foot development in Phoenix with an estimated value of $210 million.
Trading at 16.7 times cash flow, FR is relatively cheap now compared to its historical multiple.
REITs to Buy: Host Hotels & Resorts (HST)
Host Hotels & Resorts (NASDAQ:HST) is the largest lodging REIT in the world, owning 78 hotels with a combined 42,200 rooms primarily in the United States. Its stock has gotten off to a fast start in 2023 with shares up nearly 14% year to date.
The REIT’s balance sheet is very healthy. As of the third quarter of 2022, it had a net leverage multiple of 2.4x, with $2.2 billion of available liquidity should it want to acquire more properties. In addition, its revenue per available room was up 1.4% over the third quarter of 2019, suggesting that the hotel business is nearly recovered from the pandemic.
On Nov. 2, Host Hotels & Resorts announced it had acquired The Four Seasons Resort and Residences in Jackson Hole, Wyo., for $315 million. Host paid approximately 13.6 times EBITDA, or a 6.6% cap rate, defined as net operating income divided by the purchase price. The revenue per available room at the Four Seasons property is $855, making it one of the REIT’s top assets.
A key to Host’s success is getting more for the properties it sells than what it’s paying for the properties it buys. For its 2021 and 2022 acquisitions, it paid 13.1x EBITDA, while its dispositions over the same period averaged 17.7x EBITDA. That’s a win in my books.
Mid-America Apartment Communities (MAA)
As its name suggests, Mid-America Apartment Communities (NYSE:MAA) owns and operates apartment communities primarily in the high-growth Sunbelt region of the U.S. As of Sept. 30, it had an ownership interest in 101,769 apartment homes across 16 states and the District of Columbia.
Its top five markets are Atlanta (12.8% of its Q3 same-store net operating income), Dallas (9.2%), Tampa, Fla. (6.9%), Charlotte, N.C. (6.5%), and Orlando, Fla. (6.3%). These markets are all experiencing higher-than-average job and population growth, according to a recent investor presentation.
This should help Mid-America Apartment Communities attract higher-income tenants, leading to increased rents. For example, in its top market of Atlanta, the average new resident at one of its buildings earns $97,415, is 33, single, and pays $1,810 in monthly rent.
The average income for all of its top 10 markets is $92,940, with an average monthly rent of $1,719. Spread out over more than 100,00o units, that’s pretty darn good.
Over the past five years, MAA has had a cumulative return of 64.5%, considerably higher than the S&P 500’s roughly 40% return over the same period.
REITs to Buy: Healthpeak Properties (PEAK)
Healthpeak Properties (NYSE:PEAK) invests in assets serving the U.S. healthcare industry. It focuses on life sciences, medical offices and continuing care retirement communities.
Healthcare is one of those sectors that’s always in style. In fact, with an aging population, healthcare real estate becomes even more critical to the success of our medical care.
Highlights of Healthpeak’s Q3 results include a 7.5% year-over-year increase in its FFO for the quarter to 43 cents, 5.1% same-store cash adjusted net operating income growth, and an additional 36,000 square feet at its Brisbane, Calif., pharmaceutical and biotech campus being placed in service.
The REIT’s balance sheet is fortress-like, with net debt that’s just one-third of its $21.3 billion enterprise value and around 5x adjusted EBITDA.
Of the 21 analysts who cover the stock, 14 rate it “overweight” or a “buy” with an average target price of $28.68, which is about 6% above the current share price.
Boston Properties (BXP)
Boston Properties (NYSE:BXP) is the “largest publicly traded developer, owner, and manager of premier workplaces in the United States”. It owns 193 properties with 53.5 million square feet of office space generating $3.1 billion in annualized revenue as of Sept. 30.
Wisely, it concentrates its properties in six markets: Boston (34.7% of total premier space in the central business district), Washington D.C. (19.9%), San Francisco (39%), Seattle (25.1%), and Manhattan (9.6%).
Over the past 10 years, its FFO per share has grown by a 3.5% compound annual rate from $5.26 in 2014 to an estimated $7.15 in 2023.
Between 2010 and 2022, Boston Properties did an excellent job of recycling its capital. Over the 12 years, it disposed of $7.3 billion of real estate at $574.80 a square foot, acquired $7.1 billion at $518.25 a square foot, and developed $8.8 billion at $556.96 a square foot.
As I mentioned above, you want to see REITs getting more for dispositions than they pay out for acquisitions and development properties. Currently, Boston Properties has 4.4 million square feet in development, with between 49% and 100% of the space pre-leased.
BXP trades at 9.9x its projected 2023 FFO per share. Based on its earnings, BXP shares are cheaper than they’ve been in a decade.
REITs to Buy: Simon Property Group (SPG)
Simon Property Group (NYSE:SPG) went on a tear following the Great Recession. Between March 2009 and mid-2016, shares of the retail REIT gained 626%. Unfortunately for shareholders, it’s been mostly downhill since then.
From retail implosions due to e-commerce’s rising dominance to Covid-19, it’s been tough for SPG stock to get on a roll, but not for lack of trying. It’s entered multiple partnerships in the past few years to diversify its revenue beyond rents at its malls in the U.S., Europe and Asia.
In October, Simon announced that it would partner with Jamestown, an Atlanta-based real estate asset management firm with $13.1 billion under management, to invest in future mixed-use real estate opportunities. Simon acquired 50% of Johnstown as part of this partnership.
“With Jamestown, Simon will gain an opportunity to capitalize on the growing asset and investment management businesses with an experienced fund manager and mixed-use operator and developer, utilizing the Jamestown platform to accelerate Simon’s future densification projects,” the accompanying press release stated.
In November, Simon celebrated the Nobu Hotel & Restaurant opening at Phipps Plaza, Simon’s mixed-use redevelopment in the Buckhead community in Atlanta.
CEO David Simon and his uncle, Herb Simon, are some of the REIT’s largest shareholders. Their long-term approach to growing the business should pay dividends over the long haul. If Simon fails, America fails.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.