The Opportunity
REITs are hot at the moment. From its $70.61 low on October 30, the Vanguard Real Estate ETF (VNQ) is up 26% in just under two months, standing at $88.79 as of this writing. Based on the technicals, I believe VNQ will reach $129.00, probably within the next 2 – 3 years, which would be a further 45% run-up.
If the Fed follows through on its stated intention to begin reducing the prime rate next year, all risk assets will benefit, and REIT yields will become more competitive with bonds and treasuries, especially if inflation remains under the average REIT dividend.
REIT balance sheets are in very good condition, despite the two-year selloff, reflecting solid operating performance in most sectors (Office REITs being the main exception). The average REIT debt ratio is just 30%, and the average Debt/EBITDA is a sturdy 6.3. Valuations are coming back into the low end of their normal range, with an average FFO multiple of 18.0x. The average YAP (Yield At Purchase) has fallen to 3.64%, which is slightly lower than normal, and may portend broad dividend increases.
Criteria
In choosing the best REITs to invest in now, the company should maintain a strong balance sheet, with positive FFO growth projected for next year, and offer one of the following:
- High, safe dividend yield,
- High, safe dividend growth (preferably double-digit), and/or
- High FFO growth (at least 7%, preferably double-digit),
all while selling for a reasonable price.
Let’s begin by looking at the leading candidates on each of the above criteria.
Cash COWs (High, Safe Yield)
The following REITs offer yields of 5.00% or better, with Dividend Safety of B- or better, according to Seeking Alpha Quant Ratings.
| Company | Ticker | Sector | Div. Safety | Yield |
| NewLake Capital Partners | (OTCQX:NLCP) | Cannabis | A+ | 9.7% |
| Innovative Industrial Properties | (IIPR) | Cannabis | A | 7.01% |
| Kilroy Realty | (KRC) | Office | A | 5.22% |
| Cousins Properties | (CUZ) | Office | A | 5.23% |
| Apple Hospitality | (APLE) | Hotel | A- | 5.65% |
| Douglas Emmett | (DEI) | Office | B+ | 5.00% |
| VICI Properties | (VICI) | Casino | B+ | 5.24% |
| Broadstone Net Lease | (BNL) | NNN | B | 6.52% |
| City Office | (CIO) | Office | B- | 6.43% |
| EPR Properties | (EPR) | NNN | B- | 6.79% |
| Realty Income | (O) | NNN | B- | 5.33% |
Source: Seeking Alpha Premium and Hoya Capital Income Builder
Here is how these 11 Cash COWs look, on FFO growth, balance sheet, dividends, and valuation. First, we consider the top 6.
| Metric | NLCP | IIPR | KRC | CUZ | APLE | DEI |
| FFO growth/share (4-yr CAGR) % | 12.9 | 30.1 | 4.09 | 0.9 | (-0.6) | (-3.4) |
| 2024 FFO growth/share (proj.) % | 4.0 | (-1.5) | (-4.6) | (-0.8) | 3.1 | (-8.2) |
| Debt Ratio % | 0% | 10 | 50 | 38 | 29 | 55 |
| Debt/EBITDA | 0.0 | 0.8 | 6.4 | 4.8 | 3.5 | 8.2 |
| Dividend Yield at Purchase % | 9.7 | 7.01 | 5.22 | 5.23 | 5.65 | 5.00 |
| Dividend growth (5-yr CAGR) % | 5.2 | 39.1 | 3.5 | 37.6 | (-4.4) | (-6.1) |
| Dividend Score* | 11.30 | 18.85 | 5.78 | 13.61 | 4.94 | 4.14 |
| Price/FFO ’23 | 9.5 | 12.6 | 8.9 | 9.4 | 10.7 | 8.1 |
| Premium to NAV | (-11.7) | (-20.2) | (-17.8) | (-12.3) | (-10.4) | (-6.9) |
Source: Hoya Capital Income Builder and Seeking Alpha Premium
* Dividend Score projects the Yield 3 years from now on shares bought today, assuming the dividend growth rate remains unchanged.
DEI is eliminated from consideration, because of its shrinking revenues and dividends, and its troubled balance sheet. KRC goes to the bubble, because of its weak FFO forecast. APLE would go to the bubble because of its dividend shrinkage, if not for the fact that it is paying a special dividend this month, more than half the size of its regular monthly divvy. Last year in December, APLE paid investors double its usual monthly dividend. Who knows? Maybe it will become a Christmas tradition.
The two Cannabis REITs are the clear front-runners in this heat, with CUZ and APLE a distant third and fourth. However, NLCP is very small and volatile. If you want to take a taste, it would be wise to keep your allocation small and be very patient.
Next, we look at Cash COW’s 7 through 11:
| Metric | VICI | BNL | CIO | EPR | O |
| FFO growth/share (4-yr CAGR) % | 11.6 | 0.9 | 3.6 | (-1.4) | 5.7 |
| 2024 FFO growth/share (projected) % | 9.2 | 0.7 | (-2.2) | (-5.2) | 4.1 |
| Debt Ratio % | 30 | 39 | 60 | 50 | 31 |
| Debt/EBITDA | 5.7 | 4.9 | 7.8 | 6.1 | 6.1 |
| Dividend Yield at Purchase % | 5.24 | 6.52 | 6.43 | 6.79 | 5.33 |
| Dividend growth (5-yr CAGR) % | 4.5 | 4.5 | (-19.2) | (-5.2) | 3.0 |
| Dividend Score* | 5.98 | 7.43 | 3.39 | 5.78 | 5.83 |
| Price/FFO ’23 | 13.4 | 11.3 | 4.6 | 9.4 | 9.5 |
| Premium to NAV | 2.6 | (-12.9) | (-48.3) | (-10.0) | (-9.8) |
Source: Hoya Capital Income Builder and Seeking Alpha Premium
VICI comes through with flying colors here. Although it has become a little pricey relative to its NAV, its robust projected FFO growth of 9.2% justifies the upcharge. BNL has a slightly cumbersome debt ratio of 39%, but with Debt/EBITDA at just 4.9, the debt is not going to be a problem, and it has the highest Dividend Score in this heat. O has no serious weaknesses and is a strong dividend payer selling at a good price.
CIO and EPR are eliminated from the running, due to slippage in FFO and dividends, along with balance sheet issues.
Thus we are left with 6 REITs that will probably serve well, if all you want is a high, safe Yield:
- IIPR
- CUZ
- APLE
- VICI
- BNL
- O
Some of these could of course outperform on share price gain, but the high Yield is virtually guaranteed. Even if the gain turns out to be zero, you still get a return that is better than inflation, and better than most bonds.
World Beaters
As I showed in a recent article, dividend growth rate tends to predict share price gain, as both are closely related to revenue growth. Plus, over time, rapid dividend growers tend to out-yield higher-YAP stocks. Thus, you get the best of both worlds: higher yield on cost, as well as share price gain outperformance.
Here are the 10 REITs with double-digit dividend growth over the past 5 years, and Dividend Safety grades of B- or better. “CAGR” in the table below is the dividend growth rate.
| Company | Ticker | 2018 Div. | 2023 Div. | CAGR | Safety | YAP |
| InvenTrust Properties | (IVT) | .0179 | .2155 | 64.5% | A | 3.36 |
| Innovative Industrial Prop. | (IIPR) | .35 | 1.82 | 39.1% | A | 7.08 |
| American Homes 4 Rent | (AMH) | .05 | .22 | 34.5% |
A- |
2.42 |
| Rexford Industrial Realty | (REXR) | .16 | .38 | 18.9% | A- | 2.67 |
| Invitation Homes | (INVH) | .11 | .26 | 18.8% | B | 3.23 |
| Equinix | (EQIX) | 2.28 | 4.26 | 13.3% | A- | 2.09 |
| Prologis | (PLD) | .48 | .87 | 12.6% | A | 2.57 |
| Host Hotels & Resorts | (HST) | .25 | .45 | 12.5% | A+ | 4.07 |
| EastGroup Properties | (EGP) | .72 | 1.27 | 12.0% | B- | 2.75 |
| Park Hotels & Resorts | (PK) | 1.00 | 1.70 | 11.2% | A+ | 3.47 |
Source: Seeking Alpha Premium and Hoya Capital Income Builder
Let’s see how the top 5 divvy growers shape up on FFO growth, balance sheet, and valuation.
| Metric | IVT | IIPR | AMH | REXR | INVH |
| FFO growth/share (4-yr CAGR) % | 0.62 | 30.1 | 10.1 | 15.4 | 8.9 |
| 2024 FFO growth/share (projected) % | 3.66 | (-1.5) | 7.98 | 12.4 | 5.7 |
| Debt Ratio % | 34 | 10 | 28 | 15% | 30 |
| Debt/EBITDA | 5.1 | 0.8 | 5.4 | 4.5 | 5.8 |
| Dividend Yield at Purchase % | 3.36 | 7.08 | 2.42 | 2.67 | 3.23 |
| Dividend growth (5-yr CAGR) % | 64.5 | 39.1 | 34.5 | 18.9 | 18.8 |
| Dividend Score* | 14.95 | 18.85 | 5.89 | 4.49 | 5.41 |
| Price/FFO ’23 | 15.6 | 12.6 | 22.2 | 25.9 | 19.5 |
| Premium to NAV | (-1.3) | (-20.2) | (-13.6) | (-10.4) | (-20.1) |
Source: Hoya Capital Income Builder and Seeking Alpha Premium
IVT appears excellent, but with such slow FFO growth, they are not likely to be able to keep up the blistering pace of dividend growth. If you want to take a bite of this company, it would be wise to keep your allocation small and be patient.
You may have noticed that IIPR is on both the Cash COWs and the World Beaters lists. For the first time in the company’s history, it is expected to slip a little in FFO next year, but in all other respects, this company excels. Their dividend growth rate is bound to moderate, but with a Yield over 7% and a divvy growth rate of 39.1%, it has plenty of room to moderate and still be very strong.
AMH is a great choice if you are OK with a low 2.42% YAP. The same can be said of even stronger REXR at 2.67%. Both companies are selling at Price/FFO above the REIT average, but not excessively so. REXR usually sells for an FFO multiple in excess of 30, so this is a rare opportunity to get it at a relatively low price and high yield. And both AMH and REXR are selling more than 10% below their estimated NAV. Also, note that research by Hoya Capital shows that REITs selling for above-average FFO multiples tend to outperform those selling below average, for total return.
Though not quite as strong as the others previously mentioned, INVH has no serious weaknesses.
Now let’s take a look at the next 5 World Beaters.
| Metric | EQIX | PLD | HST | EGP | PK |
| FFO growth/share (4-yr CAGR) % | 8.2 | 14.1 | 1.9 | 11.6 | (-4.7) |
| 2024 FFO growth/share (projected) % | 10.0 | (-1.8) | 0.5 | 7.1 | 5.5 |
| Debt Ratio % | 22 | 18 | 30 | 23 | 74 |
| Debt/EBITDA | 4.4 | 4.9 | 2.6 | 4.4 | 8.9 |
| Dividend Yield at Purchase % | 2.09 | 2.57 | 4.07 | 2.75 | 3.47 |
| Dividend growth (5-yr CAGR) % | 13.3 | 12.6 | 12.5 | 12.0 | 11.2 |
| Dividend Score* | 3.04 | 3.67 | 5.79 | 3.87 | 4.77 |
| Price/FFO ’23 | 25.8 | 23.9 | 10.2 | 23.9 | 7.6 |
| Premium to NAV | 10.8 | 11.8 | (-11.1) | 8.6 | (-26.9) |
Source: Hoya Capital Income Builder and Seeking Alpha Premium
PK is eliminated from the running because of its significant balance sheet issues. Shares are very cheap, and the Yield is rated A- for Safety, but the company will not fare well if there is an unexpected downturn.
EQIX is extremely strong, and its price reflects that fact. If you are OK with a YAP around 2.00, this company is a good choice for share price outperformance or long-term buy-and-hold.
PLD is a great company, but when you are buying for dividend growth or share price outperformance, a step back in FFO is a serious red flag. So although PLD is a strong Hold, and will probably do well this year, it doesn’t make our best-of-the-best list this year.
HST has no serious weaknesses. However, with its very slow FFO growth, it is not likely to keep up the pace of dividend growth. Still, the YAP is about 40 bps (basis points) above average at 4.07%, and rated A+ for Safety, and there is always demand for a company like that, particularly when shares are so cheap.
Like EQIX, EGP is very strong, and its price reflects its money-making ability. In Monopoly terms, EQIX is like buying Boardwalk. EGP is like buying North Carolina Avenue.
Thus, among the World Beaters, we have 7 more strong candidates:
- IIPR
- AMH
- REXR
- INVH
- EQIX
- HST
- EGP
IIPR is on both lists, so we have a total of 12 — an even dozen!
Investors’ Bottom Line
2024 is likely to be a good year for REITs. Most REITs will probably post handsome gains in the coming 12 months, but not all REITs will flourish equally.
In all likelihood, there are some on this list that will underperform, and some I have not included in the list that will outperform. However, these are the 12 surest bets, to my way of thinking. Invest in the COWs for high, safe Yield, and the World Beaters for share price gain outperformance.
| Ticker | Sector | Mkt Cap | Price | YAP | Div. Score | FFOx | Style |
| IIPR | Cannabis | 2.88 | $101.13 | 7.01% | 18.81 | 12.6 | COW, WB |
| CUZ | Office | 3.73 | $24.58 | 5.23% | 13.64 | 9.4 | COW |
| APLE | Hotel | 3.87 | $16.76 | 5.65% | 4.94 | 10.7 | COW |
| VICI | Casino | 33.14 | $31.99 | 5.24% | 5.98 | 13.4 | COW |
| BNL | Net Lease | 3.25 | $17.33 | 6.52% | 7.43 | 11.3 | COW |
| O | Net Lease | 42.11 | $57.65 | 5.33% | 5.83 | 9.5 | COW |
| AMH | Single Family | 13.11 | $36.06 | 2.42% | 5.89 | 22.2 | WB |
| REXR | Industrial | 11.94 | $56.46 | 2.67% | 4.49 | 25.9 | WB |
| INVH | Single Family | 21.09 | $34.35 | 3.23% | 5.41 | 19.5 | WB |
| EQIX | Data Center | 75.98 | $807.71 | 2.09% | 3.04 | 25.8 | WB |
| HST | Hotel | 13.84 | $19.63 | 4.07% | 5.79 | 10.2 | WB |
| EGP | Industrial | 8.55 | $184.72 | 2.75% | 3.87 | 23.9 | WB |
Source: Hoya Capital Income Builder and author calculations
Note: just because a REIT appears on this list doesn’t necessarily mean I am advocating buying it. In fact, there is a company listed above that I would not invest in, under any circumstances.
As always, however, the opinion that matters most is yours. Because it’s your money.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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