real estate

This guide highlights which real estate investment trusts are expected to generate the most cash for investors in 2023

With Federal Reserve Chairman Jerome Powell set to deliver an important speech Friday, investors may finally begin to take him at his word: The central bank is going to maintain a hawkish stance to control the highest inflation in four decades. This means financial markets will remain volatile, despite the recent stock market rally.

There are many reasons to consider real estate investment trusts, or REITs, as relatively safe havens to provide steady income when inflation remains high and ahead of a likely economic slowdown.

Below is a screen of equity REITs expected to produce plenty of cash flow to enable dividend increases in 2023.

In the Need to Know column on Aug. 24, Steve Goldstein summarized predictions of a new “supercycle in inflation and interest rates” from Dario Perkins, managing director for global macro economics at TS Lombard. 

Perkins expects long-term interest rates to keep moving higher, and suggests the 2020s will require investors to take “a more discerning approach to asset allocation.” 

Moving away from service providers that dominated the bull market through 2021, he believes what will work best is allocation to tangible assets, including real estate. 

Breaking down the REIT sector

Real estate investment trusts come in many varieties, but the key element is they pass through most earnings to shareholders to maintain the tax-advantaged REIT structure. 

There are two broad categories of REITs: Mortgage REITs, which lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, and equity REITs, which own commercial or residential property and lease it out. 

REITs are cyclical, with valuations pressured as interest rates rise. This effect can be especially pronounced for mortgage REITs, because the mortgage-lending business slows as interest rates rise. 

So far this year, through Aug. 24, the S&P 500 real estate sector is down 15%, while the full S&P 500 SPX is down 12%, both with dividends reinvested. 

Taking a much longer-term look may surprise you. S&P Dow Jones Indices separated the real estate sector from the financial sector in 2016. But if we narrow down to the S&P 500 REIT industry group for a longer-term performance measure, the 20-year average annual return has been 9.9%, slightly ahead of the S&P 500’s 20-year average return of 9.8%.

REITs by category

Different types of REITs go through different economic cycles. For example, hotel REITs and their tenants suffered terribly in the early stages of the coronavirus pandemic, beginning with the virtual shutdown of the travel industry during the first half of 2020.

Many REITs are focused on the warehousing and logistics space, which has benefited from double-digit annual rent increases in recent years, according to Vikram Malhotra, a managing director for real estate at Mizuho. 

But Inc. AMZN said in its first-quarter financial press release in April that after doubling the size of its fulfillment network in only two years, it was “no longer chasing physical or staffing capacity” and was “squarely focused on improving productivity and cost efficiencies” in its delivery infrastructure.

During an interview, Malhotra said that following Amazon’s announcement, he and colleagues had “observed and heard in the market that Amazon was putting warehouses on the sublet market.”

“So the biggest player in e-commerce told the market it had too much and was rationalizing, and that caused the logistics stocks to de-rate,” he said.

Prologis Inc. PLD is the largest publicly traded U.S. REIT in the warehouses and logistics space. The company listed Amazon, FedEx Corp. FDX, Home Depot Inc. HD, Geodis and Walmart Inc. WMT as its five largest customers at the end of 2021, with Amazon renting 24 million square feet, or 7% of its total. 

Shares of Prologis were down 21% for 2022 through Aug. 24, with dividends reinvested. The stock’s dividend yield is about 2.5%. Prologis is set to acquire Duke Realty Corp. DRE through an all-stock deal valued at $26 billion when it was announced in June.

Mizuho has a neutral rating on Prologis, which Malhotra said was “out of consensus.” It sure is — among 17 analysts polled by FactSet, 13 rate the shares a “buy” or the equivalent. The rest are neutral ratings.

He went on to say that Mizuho is monitoring third-party logistics operators, such as XPO Logistics Inc. XPO, FedEx and United Parcel Service Inc. UPS for signs of slowing demand if the economy downshifts significantly.

With all that said, there may be a silver lining for the warehouse/logistics REITs: Malhotra expects rent growth in the space to slow to the “mid to high single digits” from the current range above 10%. The Labor Department said that the Consumer Price Index in July showed an 8.5% increase from a year earlier. That was improved from 9.1% in the previous month. It may not be too much of a stretch to expect REIT warehouse operators to be able to keep their rents increasing to match or beat the pace of inflation.

This is where your own opinion comes into play, based on your own research. Will the continuing trend toward online shopping and demand for quick delivery enable Prologis and its competitors to outperform over the next five to 10 years? Prologis’ five-year total return though Aug. 24 was 138% (compared with 85% for the S&P 500), even with this year’s big pullback.

Screening the equity REITs

To take a broad look at U.S.-listed real-estate investment trusts, we started with the 185 included in the Russell 3000 Index RUA. This index represents about 98% of U.S. stocks, according to FactSet.

We then looked at the investment concentrations of each REIT and removed all the mortgage REITs to bring the list down to 158 companies. We cut further to 112 companies for which consensus estimates were available among at least five analysts polled by FactSet for adjusted funds from operations in 2023.

A way to measure a company’s dividend-paying ability is to look at its estimated free cash flow — remaining cash flow after expected capital expenditures. For REITs, funds from operations (FFO) — a non-GAAP measure — is commonly used. FFO adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.

If we divide a company’s estimated AFFO by its current share price, we have an estimated AFFO yield. This can be compared with the current dividend yield to see if there is “headroom” for further increases — hopefully plenty of headroom.

Among the 112 remaining REITs, 104 pay dividends and have estimated 2023 headroom of at least 1.00% — that is our final cut.

We placed the 104 REITs into eight broad categories. This isn’t always easy, because a REIT may be highly diversified. So the categories are an attempt to place each REIT in a group according to its heaviest business concentration. We then consolidated a bit further to nine broad categories and sorted them by expected 2023 AFFO yield.

For example, the warehousing/logistics companies are in the “industrial” category. We’ll begin with that one.

Industrial REITs

Here are the 10 industrial REITs that passed the screen, with the highest expected AFFO yields for 2023:

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
Industrial Logistics Properties TrustILPT14.65%0.49%14.16%$536
Global Net Lease Inc.GNL12.66%11.30%1.36%$1,468
Plymouth Industrial REIT Inc.PLYM7.76%4.24%3.53%$833
Broadstone Net Lease Inc.BNL7.12%5.35%1.77%$3,497
Stag Industrial Inc.STAG6.31%4.49%1.82%$5,823
W. P. Carey Inc.WPC6.28%4.93%1.35%$16,563
PotlatchDeltic Corp.PCH5.75%3.72%2.03%$3,281
CatchMark Timber Trust Inc. Class ACTT4.43%2.77%1.66%$534
Americold Realty Trust Inc.COLD3.92%2.88%1.04%$8,232
Prologis Inc.PLD3.88%2.41%1.47%$97,078
Source: FactSet

Click on the tickers for more about each company, including business profiles. Then read Tomi Kilgore’s detailed guide to the wealth of information available for free on MarketWatch quote pages.

Health care

Here are all nine REITs that lease out health-care properties and passed the screen. This group excludes companies focused on senior housing:

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
Medical Properties Trust Inc.MPW9.94%7.63%2.31%$9,111
Global Medical REIT Inc.GMRE9.86%7.41%2.44%$742
Sabra Health Care REIT Inc.SBRA9.82%7.74%2.08%$3,582
Innovative Industrial Properties Inc.IIPR9.50%7.22%2.27%$2,710
CareTrust REIT Inc.CTRE7.71%5.08%2.62%$2,101
Community Healthcare Trust Inc.CHCT6.73%4.53%2.21%$973
Healthpeak Properties Inc.PEAK5.79%4.43%1.36%$14,617
Healthcare Realty Trust Inc. Class AHR5.50%1.69%3.81%$9,826
Welltower Inc.WELL4.43%3.15%1.28%$35,916
Source: FactSet


This category includes REITs that own single-family or multifamily residential properties, as well as manufactured housing communities and senior housing. Here are the 10 residential REITs that passed the screen:

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
National Health Investors Inc.NHI6.90%5.41%1.49%$2,971
LTC Properties Inc.LTC6.71%5.14%1.57%$1,797
BRT Apartments Corp.BRT6.22%4.07%2.15%$464
UMH Properties Inc.UMH5.88%4.35%1.52%$1,005
NexPoint Residential Trust Inc.NXRT5.82%2.64%3.18%$1,477
Apartment Inc.ome REIT CorpAIRC5.60%4.16%1.44%$6,672
Ventas Inc.VTR5.56%3.73%1.83%$19,282
Independence Realty Trust Inc.IRT5.33%2.74%2.59%$4,541
Washington Real Estate Investment TrustWRE5.02%3.39%1.63%$1,753
Source: FactSet

Hotels and leisure properties

Here are the eight REITs that lease out hotels and/or leisure properties and passed the screen: 

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
EPR PropertiesEPR10.80%7.13%3.67%$3,470
RLJ Lodging TrustRLJ10.75%1.56%9.19%$2,085
Park Hotels & Resorts Inc.PK10.48%0.27%10.21%$3,287
Pebblebrook Hotel TrustPEB10.12%0.21%9.91%$2,511
Apple Hospitality REIT Inc.APLE9.62%5.03%4.58%$3,820
Host Hotels & Resorts Inc.HST8.47%2.57%5.90%$13,366
Gaming and Leisure Properties Inc.GLPI7.36%5.53%1.83%$13,090
VICI Properties Inc.VICI5.98%4.24%1.74%$32,736
Source: FactSet


Here are the 10 REITs that hold office buildings that passed the screen:

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
Brandywine Realty TrustBDN10.88%9.27%1.61%$1,407
Hudson Pacific Properties Inc.HPP9.91%7.28%2.62%$1,945
SL Green Realty Corp.SLG9.85%8.11%1.74%$2,957
Douglas Emmett Inc.DEI9.25%5.48%3.77%$3,595
Highwoods Properties Inc.HIW8.51%6.27%2.24%$3,358
Paramount Group Inc.PGRE8.25%4.30%3.95%$1,625
Cousins Properties Inc.CUZ7.38%4.52%2.86%$4,290
Corporate Office Properties TrustOFC7.17%4.18%2.99%$2,959
Easterly Government Properties Inc.DEA6.95%5.75%1.19%$1,673
City Office REIT Inc.CIO6.94%6.45%0.50%$516
Source: FactSet


Here are the 10 REITs that mainly lease out retail properties that passed the screen:

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
Macerich Co.MAC14.68%6.02%8.65%$2,139
Simon Property Group Inc.SPG10.53%6.56%3.97%$34,922
Tanger Factory Outlet Centers Inc.SKT9.21%4.93%4.28%$1,694
Spirit Realty Capital Inc.SRC8.69%6.27%2.42%$5,763
Whitestone REITWSR8.51%4.59%3.92%$516
Store Capital Corp.STOR8.35%5.58%2.77%$7,802
RPT RealtyRPT8.11%5.13%2.98%$863
Kite Realty Group TrustKRG7.80%4.03%3.76%$4,455
Getty Realty Corp.GTY7.25%5.42%1.83%$1,413
Acadia Realty TrustAKR7.22%4.33%2.89%$1,577
Source: FactSet


Here are all five companies that passed the screen that lease out communications infrastructure properties, or, in the case of Outfront Media Inc. OUT, billboards:

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
Uniti Group Inc.UNIT18.95%6.24%12.72%$2,282
Outfront Media Inc.OUT11.73%6.40%5.33%$3,078
Crown Castle Inc.CCI4.39%3.36%1.02%$75,713
American Tower Corp.AMT4.11%2.09%2.02%$123,138
SBA Communications Corp. Class ASBAC3.99%0.85%3.1s3%$35,920
Source: FactSet

Data centers

These three data-center REITs passed the screen:

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
Iron Mountain Inc.IRM7.62%4.54%3.08%$15,828
Digital Realty Trust Inc.DLR5.56%3.88%1.67%$36,110
Equinix Inc.EQIX4.74%1.85%2.89%$61,154
Source: FactSet


For our last category, five self-storage REITs passed the screen:

CompanyTickerEstimated 2023 AFFO yieldCurrent dividend yieldEstimated “headroom”Market cap. ($mil)
National Storage Affiliates TrustNSA5.35%4.03%1.31%$5,007
Life Storage Inc.LSI4.83%3.21%1.62%$11,340
Public StoragePSA4.64%2.33%2.31%$60,213
Extra Space Storage Inc.EXR4.27%2.89%1.38%$27,811
Source: FactSet

If you are interested in the REIT space, you need to do your own research and keep your investment goals in mind — growth, income or both — and prepare to remain committed for the long term, which means several years.

Among the REITs listed in the tables, above, Malhotra has “buy” ratings on Ventas Inc. VTR, Welltower Inc. WELL, Medical Properties Trust Inc. MPW, Paramount Group Inc. PGRE and Duke Realty (which now trades in line with Prologis, in anticipation of the merger being completed). 

When asked what buy-rated REITs have in common, Malhotra said: “These are companies, as individuals, for which we believe pricing power will persist.” 

He also said that all benefit from thematic trends, including, for the health-care REITs, the aging of the population.

Photo by Anatolii Nesterov on Unsplash

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