Are REITs a good investment in 2023?
Top-performing REITs
Diversified Healthcare Trust's share price rebounded in 2023 to $3.74 per share at year-end, after falling from $3.09 per share down to 65 cents per share in 2022. Office REIT Office Properties Income Trust placed second, with a return of 89.3% for the fourth quarter.
Top-performing REITs
Diversified Healthcare Trust's share price rebounded in 2023 to $3.74 per share at year-end, after falling from $3.09 per share down to 65 cents per share in 2022. Office REIT Office Properties Income Trust placed second, with a return of 89.3% for the fourth quarter.
Bottom line. Investors eyeing REITs may find a potential recovery ahead. With rate cuts on the horizon, many publicly traded REITs have rebounded, and the industry as a whole seems well-poised for a recovery in the coming year.
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year. Publicly-traded REITs had a rough go of things during the Fed's regime of rising interest rates.
While real estate has never been a big part of Buffett's investing strategy, Berkshire Hathaway has owned shares of STORE Capital, a REIT focused on single-tenant operational real estate.
Warren Buffett owns a $15 billion stake in Occidental Petroleum Corp (NYSE:OXY) as of the end of 2023. Berkshire kept boosting its stake in the energy giant last year. Berkshire bought a whopping 10 million shares of Occidental Petroleum Corp (NYSE:OXY) worth $588 million during a single week in December 2023.
As of Dec. 12, 2023 publicly traded U.S. equity REITs posted a one-year average dividend yield of 4.09 percent.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
While REITs are known for their stable dividends, if a REIT isn't collecting its rent, it will have a hard time paying its dividend. So investors may already be pricing in a lot of potential for a dividend cut. But if that dividend cut doesn't happen, the stock may be primed to bounce higher.
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
Can REITs lose value?
Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.
What this means is that REITs are ideal borrowers for banks. They are exactly who they want to do business with because they know that the risk of a REIT bankruptcy is extremely low. Just look at the past. There have been very few REIT bankruptcies over the past 50+ years.
| NAME | SYMBOL | 2023 TOTAL RETURN % |
|---|---|---|
| Vornado Realty Trust | VNO | 41.54 |
| EPR Properties | EPR | 41.09 |
| Welltower Inc. | WELL | 39.64 |
| Lument Finance Trust Inc. | LFT | 39.36 |
Warren Buffet prefers to invest in REITs instead of real property because they are a great source of passive income, are reward-oriented, and are more liquid than property ownership.
Another stock Buffett really likes
The first new addition to the list was Occidental Petroleum (NYSE: OXY). Berkshire has been buying Occidental shares hand over fist. At the end of 2023, the conglomerate's stake in the company stood at 27.8%. It's now the sixth-largest position in Berkshire's portfolio.
AppLovin Corporation, the top-performing stock of 2023, surged 258%.
Warren Buffett made his fortune by investing in individual companies with great long-term advantages. But his top recommendation for anyone is to buy a simple index fund. Buffett's recommendation underscores the importance of diversification.
Some analysts believe Texas-based CrowdStrike Holdings, Inc. (NASDAQ:CRWD) could make investors rich in 2023 and beyond as the software company's products are seeing huge demand. Recently, BTIG Research added CrowdStrike Holdings, Inc. (NASDAQ:CRWD) in its list of top picks for the rest of 2023.
The Cheapest Option: REITs—$1,000 to $25,000 or more
These are securities and are traded on major exchanges like stocks. They invest in real estate directly, either through property purchases or through mortgage investments.
Which REIT has the best returns?
| Company (ticker) | 5-year total return | 5-year dividend growth |
|---|---|---|
| Equinix (EQIX) | 125.0% | 9.5% |
| Prologis (PLD) | 121.8% | 12.4% |
| Eastgroup Properties (EGP) | 107.9% | 13.3% |
| Gaming and Leisure Properties (GLPI) | 99.7% | 1.1% |
| Symbol | Company | REIT performance (1-year total return) |
|---|---|---|
| AOMR | Angel Oak Mortgage Inc. | 60.92% |
| SKT | Tanger Outlets | 55.01% |
| MDV | Modiv Industrial Inc. | 44.80% |
| SEVN | Seven Hills Realty Trust | 41.52% |
REITs historically perform well during and after recessions | Pensions & Investments.
REITs do not grow too much in value. This is because they are mostly structured as pass-through entities. About 90% of the rental income that the REITs earn from these properties is paid out to the investors as a dividend. A mere 10% is retained and that too, for emergency purposes and administrative expenses.
Publicly traded REITs offer investors a way to add real estate to an investment portfolio or retirement account and earn an attractive dividend. Publicly traded REITs are a safer play than their non-exchange counterparts, but there are still risks.
