2 REITs I’m Buying In The Month Of June

Introduction

With REITs pulling back recently, this has created another buying opportunity, one I continue to take advantage of in the market. With uncertainty surrounding interest rate cuts, the market has seen more volatility lately. However, I’ve ignored the noise and continued buying high-quality stocks, specifically in the REIT (XLRE) sector.

The S&P has continued to perform well, and in my opinion REITs are a few of the stocks still trading at attractive valuations. In this article I list two that are trading below their 5-year averages that I think will see some strong upside in the next 6 – 12 months.

Why REITs?

I’ve always enjoyed the idea of owning real estate properties all over the world through the stock market. I have just found this to be more attractive than owning physical properties as these take a lot of your time/money to manage. As an investor, I constantly hear about how lucrative owning physical properties are; having someone pay your mortgage.

And while many investors can get wealthy through real estate ownership, owning these can be very time consuming. Not to mention dealing with tenants who may not take care of your properties in a way that you would. I’ve discussed this in prior articles and think owning REITs is a better alternative, at least for me. No tenants or toilets to deal with. Maybe one day I will consider owning a physical property, but for now I enjoy buying and owning REITs.

Realty Income (O)

I’m sure many who follow me know I’m a huge fan of REITs, especially monthly-paying ones like Realty Income. They are my second favorite behind Agree Realty (ADC), but in the month of June I’ve been buying O instead of ADC.

And this is simply because, currently, O is trading at a more attractive valuation. At a forward P/AFFO of 12.74x, Realty Income presents the better buying opportunity. Their peer ADC currently trades at a FWD P/AFFO of 14.74x at the time of writing.

A few reasons for this in my opinion are Realty Income’s lower exposure to investment-grade tenants, their gargantuan size, and headwinds from higher interest rates. For context, ADC’s exposure to recession-proof tenants is much higher at 69% in comparison to 36.2% for the former.

Additionally, O’s top clients includes companies like Walgreens (WBA), Dollar General Corporation (DG), and Dollar Tree (DLTR). All tenants who have seen their fair share of headwinds recently. And with DLTR closing 600 family dollar stores this year and additional ones over the next few years, investors are uncertain about O’s future.

Despite this, Realty Income has continued to find attractive investment opportunities, especially in Europe. O recently boosted the lower end of its guidance to $4.15 – $4.21, up from $4.13 – $4.21 prior. Additionally, they also upped their investment (guidance) for the year to $3 billion from $2 billion.

This stemmed from an improving macro environment in Europe as interest rates were lowered for the first time since 2019. And seeing how after the recent merger with Spirit Realty Capital their annualized free cash flow is approximately $825 million, they have plenty of liquidity to grow organically for the foreseeable future. I also think over the next few years we will see Realty Income focus on higher grade tenants and more investments outside of the U.S., particularly in Europe.

On top of all this, the REIT also recently raised its dividend for the second time within a two month period, a testament to their quality portfolio and commitment to its dividend which spans over a half of century including their time as a private REIT.

Moreover, with a yield of 6% and expected growth rate of 4%, investors get double-digits returns while they wait for potential upside. Additionally, O trades well-below their 5-year average of 18.56x, indicating they are severely undervalued at the moment. And this should change once interest rates decline in the near future.

VICI Properties (VICI)

Second REIT on my shopping list is VICI Properties. I’ve been a big fan of this REIT since their IPO in 2018. Especially considering I’m a frequent traveler to Las Vegas and plan on moving to the city in the next couple years.

I’ve had the luxury of speaking to their CEO Edward Pitoniak, which only strengthened my investment thesis in the company. As a military veteran who served for 21 years, I know a thing or two about leadership having been in a (leadership) position for over half of my career.

And I can tell you, this REIT has some stellar leadership with him as their CEO. Furthermore, most know they own some of the most iconic properties on the Las Vegas Strip and the growth in the city continues with no signs of slowing down anytime soon. Aside from providing their tenant, The Venetian, with capital for reinvestment projects, the REIT continues to expand outside of the gaming space into other areas.

VICI recently provided another tenant, Great Wolf Lodge Resorts, with a $250 million loan for development projects. Furthermore, aside from providing capital to tenants for development opportunities, the REIT still has plenty of investment opportunities located in Las Vegas.

For those who may not know, VICI owns 26 acres of undeveloped land in which they can enter into a ground lease with future tenants should they choose. This would give them long-lasting, stable cash flow as ground leases are typically much longer in length. Usually 50 – 99 years.

On top of all this, Las Vegas is the most visited destination in the world. So, investors not only get to own trophy assets in one of the most popular places in the entire world, you get to buy them at an attractive valuation of just 12.64x. This is below their 5-year average of roughly 16x. And if interest rates decline, investors could potentially get upside of roughly 28%. Including the dividend yield of nearly 6% and expected dividend increase this upcoming fall, investors get paid nicely to wait.

Conclusion

Both Realty Income & VICI Properties are two high-quality REITs that trade below the sector median and their 5-year averages. They offer investors strong upside potential as well as yields near 6%. And these are backed by strong cash flows that will likely continue growing for the foreseeable future.

As REITs have been out of favor since the start of interest rate hikes in 2022, the window may be closing to pick up these two high-quality stocks at attractive valuations. With double-digit upside potential and the S&P near all-time highs, investors get to scoop up two cheap REITs with strong, growing dividends to sleep well at night.