In April 2019, I wrote an article for InvestorPlace.com discussing three reasons to start buying the Vanguard Real Estate ETF (NYSEARCA:VNQ). At the time, REITs (real estate investment trusts) were rocketing higher. With REITs still in the doghouse with investors, you might hesitate to consider Vanguard real estate ETF stock picks.
The contrarian play suggests now is the perfect time to bet on some of VNQ’s top holdings. In November, REITs soared on the news higher interest rates could be on hold. Two months later, we know that’s the case.
Now, it’s just a matter of when interest rate cuts happen. With inflation falling but not quite far enough for the Federal Reserve, it appears when it meets in March, there will be no cut. As a result, REIT stocks have slowed in 2024. VNQ is down 4.5%.
However, this short-term headwind allows investors to return to REITs before share prices take off due to lower interest rates.
Here are the three REITs I like from VNQ to ride the next upcycle in real estate.
Alexandria Real Estate Equities (ARE)
Alexandria Real Estate Equities (NYSE:ARE) is the 20th-largest holding of VNQ with a 1.29% weighting.
The California-based REIT is a pioneer in life science real estate. Founded in 1994, it has become the longest-tenured owner, operator, and developer of collaborative life science, agtech and advanced technology mega campuses in innovation centers such as Boston, San Francisco, New York City, San Diego, Seattle, Maryland and the Research Triangle in the Carolinas.
It has over 800 tenants leasing more than 75.1 million square feet of space in North America. Its occupancy rate is reasonably high at 93.7%. The REIT also makes venture capital investments into transformative life science, agrifoodtech, climate innovation and technology companies.
Its revenue through the nine months ending Sept. 30 was $2.13 billion, 10.9% higher than a year earlier. In this period, its funds from operations (FFO) were $1.14 billion, 13.3% higher than a year ago.
Based on an annualized FFO of $8.92, its stock trades at 14.1x its funds from operations. The REIT’s payout ratio is a low 55% of its earnings. Its quarterly dividend of $1.24 a share yields a reasonable 3.9%.
VICI Properties (VICI)
VICI Properties (NYSE:VICI) is the 14th-largest holding of VNQ with a 1.74% weighting.
The Las Vegas REIT owns 54 gaming properties and 39 non-gaming experiential properties in the U.S. and Canada. These properties include 127 million square feet of space with 60,300 hotel rooms and over 500 bars, nightclubs, and restaurants.
Its best-known gaming properties include Caesars Palace and MGM Grand in Las Vegas. Its top non-gaming properties include Chelsea Piers in New York and its portfolio of 38 bowling entertainment centers across 17 states and 22 cities.
Caesars Entertainment (NYSE:CZR) spun off the REIT in October 2017. It has performed considerably better than Caesars operating company over the past five years.
In December, the REIT announced expanded partnerships with its existing partners, Chelsea Piers and the Cabot Collection. The REIT started its partnership with Chelsea Piers in 2020, providing financing for the sports and entertainment complex. The December announcement saw VICI acquire a 32-year triple net lease for Chelsea Piers with a possible 10-year extension.
In addition, the REIT has provided a delayed draw development loan for Cabot’s Saint Lucia luxury golf course and resort development and the same for Cabot’s Highlands development in Scotland. Cabot is best known for its two beautiful oceanside courses in Cape Breton, Nova Scotia.
This is a continuation of the REIT’s strategy to diversify beyond gaming.
Prologis (PLD)
Prologis (NYSE:PLD) is the 2nd-largest holding of VNQ with a 7.65% weighting.
The REIT got its start in 1983 as AMB Property Corporation. It invests its institutional clients’ money in office, industrial, and community shopping centers. By 1989, it had completely exited the office market. AMB went public in 1997.
In 2011, it merged with Prologis to create an industrial REIT with more than $40 billion in assets. In 2022, it acquired Duke Realty, an Indianapolis-based REIT, for $23 billion in stock. It has nearly $200 billion in assets under management in the U.S., Europe, Asia and other Americas.
An example of how the REIT develops properties for higher and better uses is its recent offer to acquire the former headquarters for the Oakland Raiders for $24 million. The site includes 100,000 square feet of office space for the Raiders HQ and an 18,000 square feet training facility leased by the Oakland Roots soccer club, which plays in the United Soccer League, the professional soccer league one level down from MLS.
It plans to provide the soccer club with a long-term lease that would take it through 2026 and the World Cup. Eventually, the REIT could see the property turned into industrial real estate.
With a long-term investment timeframe, its management can afford to think outside the box.
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.
