Trick or treat: My 3 favorite REITs

It’s that time again where I hand out tricks and treats to real estate investment trust (REIT) investors. It’s something I’ve done every October for a decade now.

The names I choose change from year to year, of course. But one lesson remains the same: that the sweetest dividends aren’t always the ones with the highest yields.

As I explained in yesterday’s Wide Moat Show, those seemingly attractive picks often turn out to be the biggest tricks around.

Now, as I’ll acknowledge today, I understand if some REIT investors think it’s been nothing but tricks this year. Some might even say that navigating the sector has felt like tripping through a haunted house.

Higher-for-longer interest rates. Oversupply from the pandemic era. Tighter capital markets. It’s all impacted REIT operations to varying degrees – and valuations more uniformly.

Many of these companies are actually thriving, raising their dividends year in and year out regardless. But their shares don’t reflect that strength. And that can get frustrating to see day after day after day.

However, that’s why I keep pointing out how stock prices don’t always move with underlying company fundamentals. Our job is to outlast that disconnect.

When we commit to that kind of longer-term mentality, we tend to enjoy some very real treats in the end.

Before we go any further, I do want to give credit where credit’s due and point out how – despite the prevailingly negative narrative – the Equity REIT Index is still up 6.7% year to date.

That puts it clearly behind the S&P 500’s 12.3% gain, to say nothing about the Nasdaq 100’s 15.1%. But it’s still pretty good for a grouping that so many investors have written off altogether.

And, for the record, it’s not just data centers that have been pushing the index higher. Hotels, billboards, senior housing, self-storage, and regional malls are all up as well.

Mortgage REITs have struggled, to be sure. They’re down 16.8%. However, I’ve stressed for years that those businesses are very much their own category.

A well-capitalized landlord with contractual rent coming in from well-placed, well-kept properties is enormously and fundamentally different from a leveraged financial institution with a limited client pool.

The former has much more stable resources than the latter, especially when capital gets expensive.

In fact, the past several years of restrictive financing conditions have done many equity REITs a flat-out favor. Because construction activity has been dramatically curtailed in many sectors, there’s less supply being added.

Ipso facto, existing properties are more in demand, giving their owners greater pricing power and the chance to achieve higher occupancy and more sustainable rental growth.

Again, I know that’s not necessarily showing in their share prices. People are so caught up in what the Fed might do next and how that will affect REITs to realize that the objects of their concern are actually doing just fine.

But I’m calling it how I see it nonetheless. And how I see it is that earnings are emerging that are too good to pass up on.

REIT third-quarter earnings have just begun, so there’s still a lot left to report. However, what I’m seeing so far is encouraging.

I already wrote on Monday about three early-in industrial REITs. But the truth is there’s reason for optimism in multiple property sectors.

It’s looking like operating fundamentals are notably healthier than people have thought.

Take cell tower REITs. I’ve written about them recently, too, considering how SpaceX (SPCX) has “mentioned” them repeatedly this year. First Elon Musk said he would put them out of business with his Starlink network. Then he changed his mind and decided to buy up one of their competitors.

Regardless, they’re actually doing okay these days.

So are apartment REITs, which are offering encouraging guidance revisions. Manufactured housing fundamentals continue to look good, especially in this otherwise unaffordable housing environment.

And there’s also so much to say about the demographic tailwinds behind the senior housing sector.

I’m not trying to say that every single REIT is worth adding to your portfolio. There will always be those that struggle under excessive leverage or suffer from weak dividend coverage. So you always want to dig into the details for every company you consider.

But there still are plenty of examples that offer what Wide Moat Research is looking for:

That all leads me to these three REIT treats…

My first Halloween treat is American Tower (AMT), the global wireless communications giant. It has around 150,000 communications sites, plus a growing data center platform through CoreSite.

Cell towers in general are essential to our modern world, difficult to replicate, and expensive to replace. And American Tower is making good use of that model.

It’s also doing great things with its data center segment, recently raising its full-year revenue growth outlook from 13% to 16%. Full-year guidance for property revenue and adjusted funds from operations (AFFO) per share got expectation upgrades as well.

Better still, management believes things will improve even more in 2027, with a multi-year return to mid- to high-single-digit annual growth.

DISH-related tenant churn does remain a headwind. However, I think that pain will pass sooner than later.

In the meantime, American Tower has AI-driven connectivity and data center demand on its side along with the potential for new wireless network customers.

The stock trades at just 16.8x AFFO compared with its historical multiple of 22.7x. That’s a roughly 26% valuation discount that comes complete with a 3.8% dividend yield.

I see this as a compelling opportunity for approximately 20% total returns over the next 12 months.

That's my kind of Halloween candy.

My second Halloween treat is the accurately self-titled “Monthly Dividend Company,” also known as Realty Income (O).

This net-lease REIT has increased its dividend for 31 years straight now. And it owns about 15,600 properties across all 50 states and nine European markets, with more growth opportunities ahead.

Realty Income consistently leverages its scale, A rated balance sheet, and connections for further expansion. For instance, it recently formed joint ventures with both Apollo (ARI) and KKR (KKR) that allow for capital-light fee income and access to private capital.

It also signed a $6 billion data center joint venture with Cloud Capital, which is a bold, new, and exciting step forward. Yet all of this is always conducted wisely with a focus on AFFO per share instead of mere growth for growth’s sake.

So why Realty Income is trading at just 13x AFFO instead of its historical multiple of 15.5x is beyond me. That’s about a 16% valuation discount with a juicy 5.7% dividend yield on the side.

I believe investors could see 20% total returns over the next 12 months… or more.