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Investing in Real Estate Stocks in the War Against Inflation
On a national scale, housing affordability weakened in May as monthly mortgage payments jumped to 5.31% compared to 3.01% the previous year. Despite this decline, the real estate market remains robust.
NAR Housing Affordability Index Charts (NAR)
Although there has been some flattening due to higher rates and fears of a recession, these headwinds could bring supply and demand back in alignment. According to the Labor Department, inflation in June reached its highest level in 41 years, with food, fuel, and shelter as the primary contributors. The rent index had the largest monthly increase since 1986, indicating a softening in the real estate market.
"We don't have the credit issues that plagued us last time. Homeowners are financially better off than they were in the lead-up to the 2008 financial crisis. This time around, we also don't have widespread subprime mortgages. Also, if nationwide home prices do begin to plummet, the Fed could always ease up on mortgage rates," said Moody’s Analytics Chief Economist, Mark Zandi.
Real estate investments have traditionally served as a hedge against inflation over the long term. Real estate stocks, specifically Real Estate Investment Trusts (REITs), offer dividend benefits and portfolio diversification. REITs allow investors to buy shares of real estate portfolios and trade on major stock exchanges. According to a 40-year analysis performed by NAREIT, REITs have performed well in both high and low inflation periods.
REITs vs S&P 500 Returns During Varying Inflation Periods (NAREIT)
"In 2021, considered a high inflation year, REITs outperformed the S&P 500 by 12.6 percentage points with an annual return of 41.3% compared to 28.7% for the S&P 500. REITs tend to outperform in high inflation periods, with strong income returns offsetting falling REIT prices. On average, REITs outperformed the S&P 500 by 5.6 percentage points during these periods. In periods of moderate inflation, REIT dividends more than compensated for the higher price returns on the S&P, leading total returns on REITs to exceed the S&P by 3.1 percentage points. In periods of low inflation, REIT returns fall below the S&P 500 as the income portion does not make up for superior price returns on the S&P 500" - Nicole Funari, VP NAREIT Research.
One of the biggest drivers of investor inflows into REITs is inflation. Investors want to generate income and boost their risk-return profiles, especially after experiencing losses in this down market.
Largest U.S. Asset Classes (REIT.com)
Investing in high-quality companies that are undervalued and deliver attractive returns is the name of the game. Despite sales softening amid rate peaks, investing in real estate, particularly REITs, becomes an attractive option when fighting inflation. Here are two top-ranked REITs that you should consider investing in.
1. EPR Properties (NYSE:EPR)
- Market Capitalization: $3.61B
- Dividend Yield (FWD): 6.86%
- P/AFFO (FWD): 10.62
- Quant Rating: Strong Buy
EPR Properties is a leading experiential net lease REIT that offers customers the opportunity to eat, play, and have fun. Their commercial portfolio includes movie theaters, Top Golf, Margaritaville properties, leading ski resort destinations like Vail Resorts, and amusement parks. With substantial liquidity for expansion and a nearly 7% forward dividend, EPR offers excellent fundamentals for income-focused value investors.
EPR Valuation & Momentum (Seeking Alpha Premium)
Despite some short-term declines, EPR has rebounded nicely and is currently on an uptrend. They possess an attractive valuation grade, with a trailing P/AFFO outperforming the sector. EPR's growth, profitability, and analyst revisions are also in good shape. With solid cash flow, quarterly price performance, and positive trends, EPR is positioned for success. EPR recently declared a $0.275 dividend, indicating their commitment to shareholders.
"After regaining post-pandemic momentum in times when people need to have fun while making money, EPR offers the perfect mix of value and tremendous fundamentals in a REIT that performs well in high and lower inflationary environments, according to history. EPR continues to see positive trends and growth among its customer groups, which should translate into more customers and revenue, making this stock a strong buy."
2. W. P. Carey Inc. (NYSE:WPC)
- Market Capitalization: $15.87B
- Dividend Yield (FWD): 5.13%
- P/AFFO (FWD): 15.93
- Quant Rating: Strong Buy
W. P. Carey Inc. is currently ranked #1 in its sector and industry and is one of the largest net lease REITs in the U.S. and Europe. They focus on mission-critical assets like warehouses and high-quality, single-tenant properties. With over 1,336 properties, 356 tenants, and a 98.5% occupancy rate, WPC has a strong track record of increasing rents and rising real estate values.
WPC Growth & Profitability (Seeking Alpha Premium)
WPC's diverse tenant holdings and geographic locations are well-positioned to benefit from the rising rate environment. Despite concerns about the cost of capital and bank financing rates, WPC remains strong. They have consistently beaten earnings expectations and have experienced year-over-year revenue growth. With more than 99% of their net leases having built-in rent increases, WPC is set to capitalize on the current and future environment.
"WPC is a strong buy into the future, offering excellent fundamentals, bullish momentum, and discounted pricing. Ranked as one of the top diversified REITs, WPC provides investors with the opportunity to benefit from increasing rent rates and pricing competition. With strong dividend yields, growth prospects, and profitability, WPC is an attractive investment option."
Consider these top-rated REITs as hedges against inflation, as they offer solid returns over long periods, especially in the current environment. Both EPR and WPC come at reasonable price points, possess excellent fundamentals, and have bullish momentum. Investing in these REITs can provide portfolio diversification and income generation.
Note: The article is based on the original source and has been rewritten while retaining the core message and main ideas.
