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Three REITs Stand Strong Amid Slump: Morningstar's Take

The total return of the FTSE Nareit All Equity REITs index slumped 16.1% this year through May 9.
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Real estate investments in recent months have hit the skids amid rampant inflation, soaring interest rates and fears of recession.

The total return of the FTSE Nareit All Equity REITs index slumped 16.1% this year through May 9, worse than the S&P 500’s 15.9% total-return slide during that period.

But for long-term investors, some real estate investment trusts could be profitable investments. Morningstar analyst Kevin Brown recently cited three strong candidates.

Federal Realty Investment Trust FRT

Federal Realty  (FRT) - Get Federal Realty Investment Trust Report is a shopping center REIT and part of the S&P 500 Dividend Aristocrats Index. That means it has raised its dividend for at least 25 straight years.

“Many other retail REITs have had dividend cuts because of the pressures that they have faced from declining brick-and-mortar sales,” Brown said in a Morningstar interview. “However, Federal Realty has found a way to continue to raise it, and it's their top priority.”

The REIT’s success should continue, Brown said. “They should be one of the top retail REITs in terms of overall growth because they are focusing on some major development projects of mixed-use retail,” he said.

“So, you not only have ground level of retail shops and big boxes. But on top of that, you're building office buildings, apartments, and hotels, which should give those retail shops a captive audience.”

Realty Income O

Realty Income  (O) - Get Realty Income Corporation Report is a triple-net lease retail REIT, which means it’s not responsible for property expenses, including maintenance and real estate taxes. Tenants can include stores like the giant drugstore chains Walgreens Boots  (WBA) - Get Walgreens Boots Alliance Inc Report and CVS Health  (CVS) - Get CVS Health Corporation Report.

“Realty Income just sits back and collects a simple rent payment from them without having any major expenses,” Brown said.

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“And that makes it a very safe, stable business. Even in recessions, their cash flows are not changed very much because they have such a wide cushion between what the tenants’ cash flows are versus the rent payments.”

The rent payments aren’t at risk of being lowered, Brown said. “Because they have stable revenue growth, they're able to promote a stable dividend to shareholders.” Realty Income, too, is in the S&P 500 Dividend Aristocrats Index.

Ventas VTR

Ventas  (VTR) - Get Ventas, Inc. Report is a health-care REIT. It focuses on medical offices, life sciences and senior housing.

The first two areas weren’t affected by the pandemic. The medical office portfolio “should continue to grow at 2%, 3% every year and is insulated from most economic impacts,” Brown said.

“Life science is a sector that should have a significant growth ahead of it, as many pharmaceuticals continue to invest in their overall research capabilities, and many universities are expanding their research campuses.”

Senior housing, Ventas’s largest sector, providing 40% of the company's cash flow, did suffer from the pandemic. “But we think this provides a significant opportunity for growth going forward,” Brown said.

Ventas facilities didn’t have any major covid breakouts, but they weren’t bringing in new residents, Brown said. So occupancy rates fell. 

“Now, since the vaccine has been developed …, we've seen a significant recovery in occupancy,” which has grown every month since about March 2021, he said.

Occupancy rates aren’t yet back to pre-pandemic levels. “However, we think that occupancies are going to continue to reach that level and then push through, as we see the overall 80-plus population continue to grow.”

The author of this story owns shares of Realty Income and Ventas.