Real estate investment trusts (REITs) have been facing challenges due to rising interest rates in recent years. However, there are two REIT stocks that stand out as excellent investment opportunities in January. Alexandria Real Estate Equities (ARE) and Kilroy Realty (KRC) offer attractive dividends that have the potential to increase over time, unlike other income investments such as CDs.
Alexandria owns a very special type of office
Alexandria is unique among office REITs because it owns a specialized portfolio of medical research facilities. These properties combine laboratory space with traditional office space, catering to the growing demand in the healthcare industry. Despite the negative impact of the pandemic on traditional office properties, Alexandria has maintained a high occupancy rate of 93.7% and achieved rental rate increases of around 33% through the first three quarters of 2023.
Currently, Alexandria's stock trades at a significant discount from its pre-pandemic levels, making it an attractive buying opportunity. The company's recent dividend increase in December indicates its financial strength, with a funds from operations (FFO) payout ratio of around 55%. This leaves room for adversity and ensures the sustainability of the dividend. Moreover, the stock offers a dividend yield near 10-year highs at around 4%, making it an enticing option for investors.
Kilroy is right in the thick of it
Kilroy Realty specializes in traditional office space, with a growing exposure to medical research assets. Although the work-from-home trend has negatively affected the office sector, Kilroy has managed to maintain a lower-than-average vacancy rate of 14% compared to the market average of 19%. The company's properties are modern, well-located, and highly desirable for businesses and their employees. In challenging times, companies tend to upgrade to high-quality assets like those owned by Kilroy, while in good times, demand remains strong.
Despite the challenges faced by the office sector, Kilroy's stock remains undervalued, even after a recent rally. The dividend yield currently stands at 5.4%, lower than before the pandemic but still attractive for investors. The company's robust FFO payout ratio of just under 50% in the third quarter further demonstrates its financial stability and ability to sustain dividend payments.
Still well off the highs
Both Alexandria and Kilroy have weathered the difficulties posed by the pandemic and have shown resilience in the face of adversity. Although risk-averse investors should proceed with caution, those willing to take a contrarian view will find value in these stocks. Despite recent stock price increases, both REITs remain below their pre-COVID-19 levels, presenting an opportunity for potential growth. As the broader REIT sector bounces back, Alexandria and Kilroy are likely to outperform, making them top choices for investors in January.