Editor’s Note: Today, we’re continuing our prediction series with Brad Thomas to discuss the biggest developments of 2025 and what’s ahead for next year. Today, Brad shows why several REIT sectors are “ridiculously undervalued” and today’s levels and why now is the best time in years to pick up high-quality REITs.
Van Bryan (VB): Brad, let’s talk about which real estate investment trusts, or REITs, and property sectors you’re excited about for next year. Where do you see the biggest opportunities?
Brad Thomas (BT): Just starting at a high level, I really believe this will be remembered as the best time in years to buy high-quality REITs. And that’s because so many great REITs are trading at levels that look ridiculously undervalued.
Just for some context, the real estate sector has returned about 12.4%, on average, over the past 35 years. But that’s just an average. There have been individual years where the sector saw massive underperformance as well as massive overperformance to that average. And as a general rule, periods of underperformance were followed by periods of overperformance.
The 2007-2008 timeframe was, understandably, a terrible time for U.S. real estate. A mortgage crisis will do that. But what few know is that 2009 and 2010 were really great “spring back” years with real estate returning north of 20%. It happened again during COVID, with the real estate printing a negative return for 2020. But, once again, the sector sprung back in 2021.
And to give you an idea of just how poorly real estate is viewed by the market right now, I recently looked at some research from Cohen & Steers. What they found is that, for 20 years, U.S. REITs have traded with multiples at a slight discount to the S&P 500. It was about -0.6 times. But, right now, we’re seeing that discount in the -7.7 times range.
Put another way, REITs have only been cheaper relative to stocks one other time in recent history. That would be during the depths of COVID.
VB: What do you think is behind all the negative sentiment?
BT: A lot of it is rates. When interest rates rise, it also raises the cost of capital for many REITs, all else equal. And as rates rise, it tends to lift the yield on Treasurys as well. Again, all else equal, that makes the dividends from REITs less attractive. For that reason, Wall Street tends to think of REITs as bond-adjacent.
Now, I think that’s short-sighted. Unlike bonds, which have fixed coupons, REITs have the ability to raise their dividends over time. And the best REITs have done that for years or decades. The result for patient investors is they become wonderful income-producing assets that bonds just can’t compete with. But, still, whenever rates rise, REITs get hit. It’s just how Wall Street thinks.
The good news is that, barring something unexpected, rates look like they will continue falling into 2026. The Fed recently cut its key rate by 25 basis points and is guiding for more cuts next year. The yield on the 10-Year Treasury has been trending down all year.
So, the combination of rock-bottom valuations and an improving interest rate environment have me very excited for next year. But, of course, that doesn’t mean you should pick up just any real estate stock. Because there are some that are still worth avoiding.
[For readers that missed Brad’s prediction for which REITs to avoid, catch up here.]
VB: Which REITs do you like right now?
BT: The three sectors I really like right now are net lease, health care, and many of the technology-centric sectors. Maybe we can take those one at a time.
Starting with net lease, these are REITs that push almost all of the costs of owning a property – insurance, taxes, maintenance, etc. – on to the tenant. So, the net-lease REIT gets all the benefits of being a landlord without any of the headaches. These lease agreements also tend to be very long durations measured in years or decades with high-quality tenants. So, that provides a lot of dependability. Also, these leases tend to include rent escalators, some are CPI-based, which just means the REIT gets paid more rent every year.
But what’s really interesting in the net-lease space has to do with something that we spoke about last year. If you remember, I mentioned that many of the large net-lease REITs were almost acting as banks by helping companies with financing through sale-leasebacks.
VB: What does that look like?
BT: A sale-leaseback is exactly what it sounds like. A company can sell a property to a REIT and then lease it back right away. So, Target could sell a store on its balance sheet to a REIT, then lease it back. Walmart could do the same. Football stadiums, data centers owned by hyperscalers, amusement parks (think Six Flags), parking garages – conceivably anything could be used in a sale-leaseback.
And what this is, effectively, is just a form of financing. The operating company receives a cash infusion from the sale, the REIT acquires a new income-generating property, and operations on the ground remain unchanged. And, if you remember, I predicted we would see more of these partly due to how high interest rates were.
VB: And is that what happened?
BT: Oh, absolutely. I actually looked into some of the figures from SLB Capital Advisers. In the third quarter, there were 181 sale leasebacks. That was the second-highest quarterly total in 10 years. Year-to-date volume for these deals is up 23% over 2024.
So, it’s exactly what I was expecting to see from this space.
But, again, what’s so interesting is that these companies are almost acting as private equity. And yet, so few people understand this because it’s “disguised” in a REIT wrapper.
VB: Do you have a favorite company in this space?
BT: Longtime readers won’t be surprised, but I still really like Realty Income (O). I know, I talk about the company all the time, but with good reason. For one, it’s the largest company in the space by a significant margin. It carries a market capitalization of about $53 billion. The second-largest is W.P. Carey (WPC) at about $15 billion. The company is considered a pioneer in the sale-leaseback business.
But sticking with Realty Income, it owns about 15,500 properties ranging from grocery stores, convenience stores, casinos, and even some exposure to data centers. And with that size comes really important scale and cost-of-capital advantages.
The stock has actually produced a total return of about 14% so far this year. At one point, in early October, the year-to-date return was closer to 20%. So, I think this is the market beginning to price in some of the potential with REITs going forward. But even after this move, shares of O still look cheap to me. So, if readers are looking to build out that segment of their REIT portfolio, I would start there.
VB: You also mentioned health care. What are you seeing there?
BT: Health care is one of the property sectors that has outperformed this year. You have companies like Welltower (WELL), which owns nursing homes and long-term care facilities. It’s up about 58% on a total return basis. Ventas (VTR) is another name in this space – up about 40%. CareTrust (CTRE) is one more. It’s returned about 45%.
What all these companies have in common is that they’re all leveraged to the “silver tsunami” thesis. That simply means that the Baby Boomers are now aging into their golden years. And as they age, they’ll make more use of health care and long-term care facilities. Actually, 2025 was notable because it’s believed to have been “Peak 65,” or the year when a record number of the Baby Boomers turned 65. By 2030, about 21% of the U.S. population – some 73 million people – will be 65 or older. That’s a lot of new demand coming to health care. And it’s one of the reasons why these REITs are so interesting right now.
VB: And what names do you like in this space?
BT: One REIT we hold in the Wide Moat Letter is Healthpeak Properties (DOC). It’s a company that owns a portfolio of nursing home and long-term care facilities as well as medical labs and outpatient medical facilities. So, DOC sits squarely in a market that should see heightened demand as more Americans age into their golden years.
And, like so many quality REITs, I think it’s cheap. It trades for around 11 times adjusted funds from operations versus a 10-year average of about 16.4 times. And it yields about 6.7% right now.
Another REIT that’s not actually in health care, but is still a beneficiary of this trend, is Equity Lifestyle Properties (ELS). The company owns a portfolio of age-restricted manufactured housing properties in states like Florida and Arizona. Both states, as I’m sure you know, are popular destinations for retirees.
The interesting thing about manufactured housing is that they’re actually much more affordable relative to traditional housing. In some instances, purchasing a manufactured house might only be around $50,000, and then the tenant signs a ground lease, which includes amenities, with the Equity property. So, in that sense, Equity Lifestyle is also helping to continue the retirement dream for many Americans that are entering their retirement years.
I know it’s been a difficult few years for REIT investors. But all these factors – the relative undervaluation, the improving rate environment, and these long-term tailwinds – have me really excited for these property sectors as we enter 2026.
Editor’s Note: Tune in tomorrow where we’ll continue our conversations with Brad. We’ll talk AI, the staggering levels of spending from the hyperscalers, and why a “tech trifecta” in real estate could produce some of the best returns going forward.
And if you’re eager for more insights from Brad right now, we encourage readers to watch this presentation. In it, Brad shows why an executive order out of the White House is setting the stage for a “land rush” as we enter the new year. Get all the details right here.
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