Real Estate Investment Trusts (REITs) continue to be a sought-after investment option, especially in the ever-evolving landscape of real estate. In 2023, despite challenges like high interest rates and commercial vacancies impacting the real estate market, these top-performing REITs have shown resilience and promise. This comprehensive guide delves into the top REITs of 2023 in three categories: best value, fastest growth, and most momentum-driven, to help you navigate the world of REIT investments effectively.
Best Value REITs
Investors looking for value often focus on the 12-month trailing price-to-earnings (P/E) ratio. A low P/E ratio can indicate that you’re paying less for each dollar of profit generated. Here are the best value REITs for 2023:
Minto Apartment REIT (MI.UN.TO)
- Price: CA$14.97
- Market Cap: CA$0.6 billion
- 12-Month Trailing P/E Ratio: 3.6
- About: Minto Apartment REIT owns multi-residential properties in Alberta, Quebec, and Ontario, Canada. In Q1 2023, it reported an 18% revenue growth due to higher occupancy rates and rents. Despite a net loss attributed to non-cash fair value losses, its dividend history remains strong.
Apollo Commercial Real Estate Finance Inc. (ARI)
- Price: $10.93
- Market Cap: $1.5 billion
- 12-Month Trailing P/E Ratio: 6.0
- About: Apollo Commercial Real Estate Finance specializes in commercial real estate loans across Europe and the U.S. Its steady performance and attractive P/E ratio make it an appealing value proposition.
Slate Grocery REIT (SGR.UN.TO)
- Price: CA$13.05
- Market Cap: CA$0.8 billion
- 12-Month Trailing P/E Ratio: 7.0
- About: Slate Grocery REIT focuses on U.S. grocery-anchored properties. With a diverse portfolio, it presents an opportunity for investors seeking value in the real estate sector.
Fastest-Growing REITs
For those interested in growth potential, we’ve identified the fastest-growing REITs for 2023, based on impressive revenue and earnings-per-share (EPS) growth:
National Health Investors Inc. (NHI)
- Price: $53.50
- Market Cap: $2.3 billion
- EPS Growth (%): 339
- Revenue Growth (%): 16
- About: National Health Investors focuses on senior housing and healthcare real estate. Its substantial growth in both EPS and revenue positions it as a strong growth candidate.
Farmland Partners Inc. (FPI)
- Price: $12.27
- Market Cap: $0.6 billion
- EPS Growth (%): 330
- Revenue Growth (%): -9
- About: Farmland Partners acquires farmland in North America and provides farmers with secured loans. Its robust growth in EPS is notable, even with a decline in revenue.
Apollo Commercial Real Estate Finance Inc. (ARI)
- Price: $10.93
- Market Cap: $1.5 billion
- EPS Growth (%): 300
- Revenue Growth (%): 44
- About: Apollo Commercial Real Estate Finance’s strong growth in both EPS and revenue makes it a compelling choice for growth-focused investors.
REITs With the Most Momentum
Investors seeking momentum-driven investments can explore these top REITs with impressive stock-price returns over the past 12 months:
Apartment Investment & Management Co. (AIV)
- Price: $8.57
- Market Cap: $1.3 billion
- 12-Month Trailing Total Return (%): 37
- About: Apartment Investment & Management Co. specializes in the multifamily market and demonstrates substantial momentum.
Service Properties Trust (SVC)
- Price: $9.13
- Market Cap: $1.5 billion
- 12-Month Trailing Total Return (%): 37
- About: Service Properties Trust invests in hotels and retail net lease agreements, with over 200 hotels in North America. Its significant momentum is backed by a strong financial performance.
Tanger Factory Outlet Centers Inc. (SKT)
- Price: $21.90
- Market Cap: $2.3 billion
- 12-Month Trailing Total Return (%): 35
- About: Tanger Factory Outlet Centers operates open-air outlet centers in Canada and the U.S. Its momentum is driven by a dividend increase and positive Q1 2023 results.
These top 5 REITs for 2023 offer a diverse range of investment opportunities, from value and growth to momentum-driven options. Understanding key metrics like FFO and AFFO, along with the advantages of investing in REITs, will empower you to make informed investment decisions in this dynamic sector.
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Key Metrics for Analyzing REITs
Key metrics for analyzing Real Estate Investment Trusts (REITs) include Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO). These metrics provide insights into a REIT’s financial performance and its ability to generate income for investors.
1. Funds from Operations (FFO):
FFO is a crucial metric for assessing a REIT’s financial health. It measures the cash flow generated through a REIT’s core operations by adding and subtracting specific items from net income. FFO provides a more accurate reflection of operational performance because real estate assets typically appreciate over time, unlike many other assets.
The formula to calculate FFO is as follows:
FFO = Net Income + Depreciation + Amortization – Gains from Property Sales
Practical Example Calculating FFO:
Let’s consider an imaginary company, ABC REIT, which reported the following financial figures for a specific period:
- Net Income: $1,000,000
- Depreciation: $50,000
- Amortization: $100,000
- Gains from Property Sales: $200,000
Using these figures, we can calculate ABC REIT’s FFO:
FFO = $1,000,000 + $50,000 + $100,000 – $200,000 = $950,000
So, ABC REIT generated $950,000 in funds from its core real estate operations during the specified period.
2. Adjusted Funds from Operations (AFFO):
While FFO is a critical metric, it doesn’t consider all the ongoing costs associated with managing a real estate property, such as capital maintenance expenditures. AFFO adjusts FFO to account for these recurring expenses, providing a clearer picture of a REIT’s ability to distribute dividends to shareholders.
The formula to calculate AFFO is as follows:
AFFO = FFO – Capital Maintenance Expenditures – Rent Adjustments
Practical Example Calculating AFFO:
Using the same company, ABC REIT, and the following additional figures:
- Capital Maintenance Expenditures: $75,000
- Rent Adjustments: $100,000
We can calculate ABC REIT’s AFFO:
AFFO = $950,000 – $75,000 – $100,000 = $775,000
So, ABC REIT’s adjusted funds from operations, considering capital maintenance expenditures and rent adjustments, amount to $775,000 for the specified period.
In summary, FFO and AFFO are vital metrics for assessing the financial performance of REITs. FFO reflects cash flow from core operations, while AFFO provides a more comprehensive view by considering recurring expenses. These metrics help investors gauge a REIT’s ability to generate income and make informed investment decisions.
Advantages of Investing in REITs
REITs offer several advantages, including:
- Liquidity: REITs are easily tradable on major stock exchanges, enhancing liquidity.
- Diversification: REITs allow investors to diversify their portfolios across various real estate sectors.
As commercial real estate comprises a significant portion of the investment market, considering REITs can provide investors with exposure to this lucrative asset class.
To Recap
REITs offer a unique avenue for real estate investment, combining the benefits of real estate ownership with liquidity and diversification. While they can be a valuable addition to your portfolio, it’s essential to conduct thorough research, consider your risk tolerance, and align your investments with your financial goals. Whether you seek income, growth, or inflation protection, REITs can play a role in your investment strategy. Understanding key metrics and the advantages of investing in REITs can empower you to make well-informed investment decisions in this dynamic sector.
Frequently Asked Questions
Thinking about investing in Real Estate Investment Trusts (REITs) but need some clarity? We’ve got you covered with this comprehensive FAQ section that addresses common questions and provides valuable insights into the world of REIT investing.
What Are the Top 3 REITs in the US?
- Prologis, Inc. (PLD): A leader in logistics real estate, Prologis benefits from the surge in e-commerce and global supply chain needs.
- American Tower Corporation (AMT): American Tower dominates the communication infrastructure sector, with a focus on cell towers and data centers, catering to the growing demand for wireless connectivity.
- Simon Property Group, Inc. (SPG): The largest owner of shopping malls in the US, Simon Property Group continues to shine in the retail real estate space.
What Types of REITs Exist, and Which One Is the Safest?
REITs come in various types, including equity REITs (owning income-generating properties), mortgage REITs (dealing in mortgages and mortgage-backed securities), and hybrid REITs (combining elements of both). Generally, equity REITs are considered safer due to their stable income-producing properties. However, safety also depends on individual REITs’ financial health and the specific real estate sector they operate in.
Can REITs Lose Money, and What Are the Risks?
Yes, like any investment, REITs can incur losses. Risks include market downturns, economic recessions, declining property values, and rising interest rates. Sector-specific challenges can also impact REITs, such as retail real estate facing competition from e-commerce. It’s important to assess these risks and diversify your investments.
Do REITs Pay Dividends, and How Are They Taxed?
Yes, REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. These dividends can be a source of regular income for investors. Regarding taxes, REIT dividends are typically taxed at your ordinary income tax rate. However, they may qualify for the qualified dividend tax rate under certain conditions.
Which REITs Outperform the S&P 500, and How Do They Compare?
Historically, REITs have often outperformed the S&P 500 in terms of dividends and total returns. However, it’s crucial to note that past performance doesn’t guarantee future results. The performance of individual REITs varies by sector and market conditions. To make informed investment decisions, research specific REITs and consider your financial goals.
Are REITs a Good Hedge Against Inflation?
REITs can serve as a potential hedge against inflation due to their real estate holdings. As inflation rises, real estate values and rental income can increase, potentially benefiting REIT investors. However, the extent of this protection depends on various economic factors and the specific type of real estate in a REIT’s portfolio.
How Do I Invest in REITs, and What Are the Costs?
Investing in REITs is straightforward. You can purchase REIT shares through a brokerage account, just like you would with stocks. Costs include brokerage commissions, management fees (for REIT mutual funds or ETFs), and potential taxes on dividends. Ensure you understand the fees associated with your chosen investment method.
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