Why I’m Buying This Sector At It’s Dip
In recent weeks, Real Estate Investment Trusts (REITs) witnessed a significant sell-off, triggered by the interest rates maintaining in March. For many investors entrenched in short-term perspectives, this news alone sufficed as a reason to divest from REITs. However, amidst this t market climate, I find myself inclined to adopt a contrarian stance and view this dip as an opportunity for gains.
While short-term market fluctuations may sway sentiments, the long-term outlook for interest rates remains relatively stable. Despite the current market pricing indicating up to five potential rate cuts in 2024, the precise timing of these adjustments becomes inconsequential within the broader investment horizon. What holds importance is the anticipated trajectory of interest rates, poised to debunk the prevailing “higher for longer” narrative that has adversely impacted REITs since early 2022.
Presently, a considerable portion of investors remains skeptical about the likelihood of rate decreases, opting to seek refuge in money-market funds under the impression of sustainable 5% yields. However, as economic realities unfold, a significant capital influx into REITs seems imminent, potentially propelling them to higher valuations.
1. EPR Properties (EPR):
Amidst recent volatility, EPR’s share price receded to $42 from its earlier peak near $50, nearing its October 2023 levels. Notably, EPR already boasted an attractive valuation prior to this dip, positioned at a considerable discount relative to its peers. The company’s focus on experiential net lease properties, encompassing domains such as movie theaters, amusement parks, and fitness centers, initially subjected it to heightened vulnerability during the pandemic and subsequent inflationary pressures.
However, as we transition away from the pandemic era, EPR’s tenants have showcased remarkable resilience. The portfolio’s rent coverage presently exceeds pre-pandemic levels, with even the historically challenged AMC reporting its first profitable quarter. Moreover, with inflationary pressures abating and impending interest rate cuts on the horizon, the risk of lease defaults diminishes significantly.
Despite the evident strides in risk mitigation, EPR continues to trade at a substantial discount compared to its peers. As interest rates retreat, I anticipate valuation multiples across the net lease sector to expand, potentially narrowing the gap between EPR and its counterparts. This presents an opportune moment for investors, offering the prospect of substantial upside potential alongside an attractive monthly dividend yield of approximately 8%.
2. W. P. Carey (WPC):
Following its fourth-quarter results announcement, WPC witnessed a 6.5% decline in its share price, attributed to slightly below-expectation performance and cautious guidance for 2024. Although certain operational challenges, such as lease expirations and tenant renegotiations, have momentarily impacted cash flows, these setbacks remain transient in nature and represent a minute fraction of WPC’s extensive portfolio.
Furthermore, WPC’s strategic divestment from the office sector, coupled with a prudent payout ratio adjustment, positions it as a quasi-industrial REIT poised for accelerated growth. With approximately two-thirds of its rental income derived from industrial assets, WPC stands primed for a revaluation, potentially offering a 30% upside as market perceptions align with its transformed business model.
By recognizing the intrinsic value in REITs such as EPR Properties and W. P. Carey, investors can capitalize on the impending interest rate adjustments and prospective growth trajectories, all while enjoying lucrative dividend yields.
