REITs are an excellent method to diversify your portfolio and own real estate without becoming a landlord. But first, there are two REITs in which I would recommend investing. Let us first define a REIT and how it operates.
What’s a REIT ( Real Estate Investment Trust)?
REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.
How Do REITs Make Money?
Most REITs follow a simple and uncomplicated business model: by leasing space and collecting rent on its real estate, the corporation produces cash, which is subsequently distributed to shareholders in the form of dividends. REITs must distribute at least 90% of their taxable income to shareholders, with the majority distributing 100%. Dividend income taxes are then paid by shareholders.
What are the different types of REITs?
- Equity REITs – The majority of REITs are publicly traded equity REITs. Equity REITs own or operate income-producing real estate. The market and Nareit often refer to equity REITs simply as REITs.
- mREITs – mREITs (or mortgage REITs) provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
- Public Non-listed REITs – Public, non-listed REITs (PNLRs) are registered with the SEC but do not trade on national stock exchanges.
- Private REITs – Private REITs are offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges.
For this article we will be talking about Equity REITs and two great ones that I think are worth investing in and holding as long as possible.
Two REITs you should own in 2024 and beyond
Vici Properties (VICI)
Vici Properties is the world’s premier real estate investment trust (REIT) specializing in experiential properties such as casino resorts. It owns some of the most well-known resorts in Las Vegas, including Caesars Palace, The Palazzo, The Venetian, and MGM Grand, as well as other properties in 15 states. It has also expanded to non-casino experiences such as golf courses and resorts.
The nicest aspect is that, as the landlord, it isn’t harmed nearly as much when casino revenue falls. Even though the Las Vegas Strip was essentially shuttered during the pandemic, Vici earned 100% of the rent. During this time, Vici even increased its dividend. Actually, the dividend has increased every year since Vici’s founding.
The corporation wants to raise the dividend every year, and the financials back this up. Over the last four quarters, approximately 75% of adjusted funds from operations per share (the measure of a REIT’s ability to maintain the dividend) was required to support the current dividend.
The dividend presently yields 5.3%, which is substantially above inflation. All of this adds up to a sound long-term investment.
Realty Income Corp (O)
Realty Income has amassed a property portfolio and populated it with tenants who have weathered multiple economic downturns. Its top 20 tenants are all from one of the following categories: Non-discretionary, low-cost, service-oriented, or non-retail. This makes them significantly more resilient than high-end luxury retailers, which may experience a drop in sales during a recession.
As a result, Realty Income maintains a continuously high occupancy rate. In the third quarter, it filled 98.8% of its units. Its long-term leases also assure that it will keep its high occupancy rate. The average lease has around ten years left on it.
The disadvantage of Realty Income’s strategy is that it results in moderate and stable growth. Rents rise by only a percentage point or two per year. As a result, acquisitions are its primary source of expansion. Spirit Realty, its most recent acquisition, will cost more than $9 billion but add 2,000 additional properties with tenants similar to Realty Income’s existing clientele.
The Spirit Realty acquisition is expected to help the company boost adjusted funds from operations (AFFO) by 4% to 5% next year. That works out to about 13.7 times next year’s AFFO forecast. That’s a more than reasonable amount to pay for a company with regularly expanding profitability and free cash flow, as well as Realty Income’s dividend track record.