In recent years, real estate investment trusts (REITs) have notably underperformed compared to broader market indices, largely due to elevated interest rates. High interest rates place significant pressure on REIT share prices for two primary reasons.
Firstly, REITs often rely on debt to finance growth, and with borrowing costs rising, their interest expenses have surged. Secondly, the allure of fixed-income securities, such as Treasury bills, has increased as investors seek safer, more predictable returns in a high-interest environment.
However, as we enter August without any rate cuts yet, this could be an ideal time to give the sector a chance. With anticipated interest rate reductions later this year, the financial strain on REITs might soon ease. Therefore, REITs that have been beaten down and are still trading at low levels could present compelling opportunities with significant upside potential.
In this article, I’ll spotlight three of the best REITs to buy, poised to benefit from the anticipated sector recovery. Let’s take a deeper look!
CubeSmart (CUBE)
A fairly overlooked REIT that I believe deserves investors’ attention today is CubeSmart (NYSE:CUBE). As a self-managed REIT, CubeSmart focuses on self-storage properties, boasting ownership of 615 facilities and the management of an additional 879, totaling 1,494 stores. With nearly 380,000 customers and generating around $1 billion in revenue last year, CubeSmart clearly operates on a significant scale.
Recent performance has been a mixed bag. For Q2, CubeSmart reported a 2.1% rise in revenues year-over-year (YOY), reaching $266.2 million. This growth was largely due to new property acquisitions and a rise in managed stores. However, same-store revenue growth was modest at 0.3%, and same-store NOI declined by 1.2% due to an increase in operating expenses. FFO fell by 2.4% to $146 million, with per-share FFO landing at $0.64, down from $0.66 last year.
Despite these somewhat soft numbers, CubeSmart’s valuation remains attractive relative to its growth prospects. The self-storage sub-industry space continues to be resilient, and CubeSmart’s continuous property expansion positions it well for future growth. With the stock currently trading at 17.9 times this year’s expected FFO/share and this figure set to accelerate once the rate cuts in, I believe CubeSmart stands as an attractive pick amongst REITs today.
SBA Communications (SBAC)
Let’s now turn our focus to SBA Communications (NASDAQ:SBAC), a prominent player in the wireless infrastructure sector. As an independent owner and operator of wireless communications infrastructure, including nearly 40,000 tower sites across the globe, SBA is a rather unique REIT. Its towers support antennas for multiple telecom providers, making SBA a critical player in the connectivity ecosystem. Therefore, SBA tends to generate extremely resilient and predictable cash flows.
This was once again evident in its most recent Q2 results. While its revenues declined by 2.7% YOY to $660.5 million, this was only due to site development, a relatively small and volatile division in the business, seeing a revenue decline of 35%. The core site leasing business remained resilient, with its revenues up 1.2%. For the quarter, AFFO also grew by 1.5%, with AFFO per share rising by a further 2.8%, bolstered by share buybacks.
Moving forward, SBA should continue to grow at a steady pace. During the quarter, the REIT acquired 117 communication sites and built 100 new towers. The company has also committed to purchasing 106 additional towers, indicating a robust growth pipeline. With shares trading at about 18 times this year’s projected AFFO/share and interest rate cuts set to enhance profitability significantly, I believe SBAC stock is another great pick amongst REITs today.
Invitation Homes (INVH)
As we examine our final REIT, Invitation Homes (NYSE:INVH), we see a major player in the single-family rental market. Invitation Homes owns and manages roughly 85,000 rental properties across 16 U.S. markets, offering high-quality homes in affluent locations. The company focuses on meeting evolving lifestyle needs with well-maintained homes close to employment centers and good schools, thus commanding premium rents.
In its most recent Q2 report, Invitation Homes sustained strong momentum despite the rather tough residential real estate market. Revenues grew by 8.8% YOY, hitting $653.5 million. This growth was supported by robust rent increases, with same-home new lease rent up 3.6% and renewal rent growing 5.6%, leading to a blended rent growth of 5.0%.
Despite a slight 10 basis points drop in same-store average occupancy to 97.5%, the REIT’s strong top-line performance more than offset this decline. Further, AFFO per share grew by 2 cents to $0.40, reflecting effective cost control despite recent share issuances for home acquisitions. Further, management reiterated their outlook, estimating AFFO/share to be between $1.55 and $1.61. While the midpoint of this range implies a rich P/AFFO of about 22.5, the company’s strong growth, which is likely to be accelerated post-cuts, should easily justify this multiple.
On the date of publication, Nikolaos Sismanis did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
