Investors have had a rough go of it so far this year, and the setup for the next month or so, and perhaps beyond, looks grim. Since 2008 and the historic market collapse, the Federal Reserve has time and again bailed out the equity markets by keeping interest rates abnormally low and engaging in quantitative easing to make sure rates stayed low. However, that gambit is over, as the Fed has painted itself into a corner and inflation is at the highest level in 40 years.
The kind of volatility we saw this week is very telling. Monday’s final hour rally was probably a combination of quick trading algorithms and short covering. The same is true on Tuesday, to some degree. The bottom line for investors worried about rising interest rates is that, even if the central bank raises rates four times this year and next, we are looking at a federal funds rate of probably 2.0% to 2.5%. On a historical basis, that is still incredibly low, especially compared to the 5.25% rate in 2007.
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Historically, real estate investment trusts (REITs) do not respond well to rate increases. Yet, with staggering inflation, real estate and hard assets are in demand now. A new Raymond James research report highlights the top picks in the firm’s REIT universe. It said this when discussing rate increases and their effect on the industry:
The only major sector fundamental pushback (versus. the macro pushback: rates/inflation) was continued cap rate compression which is impacting investing spreads. The good news is investing spreads have been above long-term averages for the past several years, providing some cushion for increasing interest rates and compressing cap rates. Based on the company updates received thus far in January, cap rates continued to compress in the fourth quarter for assets leased to both investment grade and non-rated/BIG tenants.
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We screened the Raymond James list and found one stock rated Strong Buy and four that are Outperform rated. They all pay outstanding distributions to shareholders. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Agree Realty
This top REIT has backed up since printing highs last summer and has big potential upside. Agree Realty Corp. (NYSE: ADC) is primarily engaged in the acquisition and development of properties net leased to industry-leading retail tenants. As of September 30, 2020, the company owned and operated a portfolio of 1,027 properties, located in 45 states and containing approximately 21.0 million square feet of gross leasable area.
The Raymond James team is very positive and noted this in the report:
Looking forward to 2022, Agree announced full-year acquisition guidance of $1.1-1.3 billion (just below our $1.4 billion assumption, though we would highlight Agree’s track record of raising/exceeding its acquisition goalposts). Turning to dispositions, Agree expects to sell between $25-75 million of assets in 2022.
Investors receive a monthly 4.20% distribution. The Strong Buy rating comes with an $82 price target. The consensus is $80, and the shares traded early Wednesday at $65.55.
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Alpine Income Property Trust
This high-yielding gem is perfect for conservative investors looking for dependable income. Alpine Income Property Trust (NASDAQ: PINE) is a newly organized real estate company that owns and operates a portfolio of high-quality single-tenant net lease commercial properties, all of which are leased on a long-term basis and located primarily in or near major metropolitan statistical areas.
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The Alpine Income Property Trust portfolio consists of 113 properties located in 31 states, and the Raymond James team had this to say about the fast-growing company:
During the fourth quarter, the company acquired 26 retail properties for $102 million at a 6.2% initial cash cap rate (reflecting a much lower cap rate vs the 7.2% registered on activity through September 30). Included in 4Q acquisitions was a previously announced portfolio deal consisting of nine retail ground lease parcels located in Houston, TX that were acquired for $43.5M from a private seller (which was likely the driving force behind the lower cap rate registered in 4Q). The properties span 11 states, 10 unique operating sectors, and 32% of annualized base rent (ABR) is derived from investment grade tenants.
In 2021, acquisitions totaled $260 million at a 6.8% initial cash cap rate (37% investment-grade). As of December 31, the portfolio was 100% leased, with 9% of ABR coming from ground leases and 45% from investment-grade tenants.
Investors receive a 5.25% distribution. Raymond James has set a $23 target price, while the consensus target is $22.36. The share price was $19.60 Wednesday morning.
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Four Corners Property Trust
This is a great idea for investors looking for income and an inflation hedge. Four Corners Property Trust Inc. (NYSE: FCPT) engages in the owning, acquisition and leasing of properties for use in the restaurant and food-service-related industries.
The company’s Real Estate Operations segment consists of rental revenues generated by leasing restaurant properties. The Restaurant Operations segment comprises the Kerrow Restaurant business.
The analysts noted this:
During the fourth quarter, Four Corners acquired 33 properties for $70 million (no cap rate disclosed thus far) which included the final properties acquired from the previously announced portfolio transactions with Washington Prime (which totaled 59 properties and over $100 million). For the full year 2021, the company acquired 122 properties totaling over $257 million.
Investors receive a 4.93% distribution. The $32 Raymond James price objective compares with a $32.80 consensus target. Shares were trading at $27.50 apiece.
Realty Income
This is an ideal stock for growth and income investors looking for a safer, inflation-busting idea for this year. Realty Income Corp. (NYSE: O | O Price Prediction) is an S&P 500 company dedicated to providing stockholders with dependable monthly income. It is structured as a real estate investment trust (REIT), and its monthly dividends are supported by the cash flow from over 6,500 real estate properties owned under long-term lease agreements with commercial tenants.
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To date, the company has declared 604 consecutive common stock monthly dividends throughout its 51-year operating history and increased the dividend 108 times since its public listing in 1994, garnering it a spot on the S&P 500 Dividend Aristocrats index.
Realty Income stock investors receive a 4.32% distribution. The Raymond James price objective is $76. The consensus target is higher at $78.71, and shares traded at $69.20 early Wednesday.
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Spirit Realty Capital
This top company is the highest yielding of the Raymond James picks. Spirit Realty Capital Inc. (NYSE: SRC) is a premier net-lease REIT that primarily invests in single-tenant, operationally essential real estate assets, subject to long-term leases.
As of September 30, 2020, the company had a diverse portfolio of 1,778 owned properties, with an aggregate leasable area of 37.2 million square feet in 48 states, including retail, industrial and office buildings leased to 296 tenants across 28 retail industries.
The analysts are very positive and said this in the research report when discussing the potential for a strong 2022:
Spirit announced 2022 adjusted funds from operations/share guidance of $3.52-3.58 (above our $3.48 estimate and consensus of $3.47 at the time of the announcement), implying ~7.4% year-over-year growth at the midpoint. The initial guidance assumes $1.3-1.5 billion of capital deployment (we are now modeling just under $1.5 billion) as well as ~$100 million of dispositions.
Investors receive a 5.59% distribution. Raymond James has set its target price at $55. The consensus target is $53.37, and the stock was trading at $46.50.
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These five top REITs pay dependable distributions, some above the 5% level. With the prospect of continued low interest rates despite the Federal Reserve hikes this year and next, and the stock market extremely risky and very volatile, it makes sense to have solid assets like real estate. It is important to remember that REIT distributions can contain return of principal.
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