People are avoiding REITs, and many said they wouldn’t touch them with a ten-foot-long pole. It is interesting to see the irrational behavior of people not experienced in investing. For example, in 2021, when Realty Income (O) was trading at $70 a share, everybody was rushing in and buying. Everybody was claiming to be a long-term investor investing for a long haul and years of passive dividend income. Fast forward, and Realty Income is trading at $53.31 (24% discount), and they say they wouldn’t buy it.

 

 

Some claim that REITs destroyed their investment and that they would never recover as the FED keeps raising interest rates, and that would be a headwind for this investment vehicle. Others are expecting a recession, which would further press the REITs down. People do not want to invest in these stocks for many reasons.

But this is the right time to do so! Many REITs are down 20% -30 %, and if you claim to be a long-term investor, here is your opportunity! So listen to your guts. If you are scared and want to run away from REITs, do the opposite.

Yes, REITs are sensitive to interest rates. But the best time to invest in them is at or near the end of the interest hike cycle. And we see inflation dropping (still high but going lower), which means that the FED is probably done hiking the rates. That will help REITs to recover. And even if we are going into recession, the FED will cut the rates even more. Again, that would uphold REITs. They may tank eventually on fears of people defaulting on their loans and an overall crash in the housing market, but they will recover. Many of them increased their dividend during recessions.

For example, the Realty Income, as mentioned above, tanked almost 50% in 2009 from $28 a share to $15, but if you were brave enough and bought when the stock was down, you would have gained 426% profit by 2020. And that was just a capital gain. Include dividends into the mix, and you will be an ultimate winner. So why are you scared today? Are you investing for the next year or two or 10 or 20 years?

I wrote about REITs on this blog multiple times. In 2012, I asked the same question: “Why are REITs falling and will they recover?” Today, we are asking the same question. And many of the REITs recovered.

 

But not all REITs are made the same!

 

Not all REITs are good despite being cheap today. Some are wealth-destroying yield traps, and you should avoid them. For example, in the past (or even in my past article), I wrote about ARR or AGNC. If you look at their history, they are littered with dividend cuts and reverse splits. To inexperienced investors, they may look fine and offer a significant income. They destroy it and bring in long-term losses.

 

 

To find a stock worth your attention and money, you want to look at the underlying performance. Is a particular REIT cheap for a reason or because of unreasonable panic in the dumb Wall Street?

 

REITs to avoid – DHC

 

DHC is an example of a REIT you would like to avoid. The company was started in 2003, and since 2006, it experienced declining fundamentals. Yet the management kept increasing dividends until 2018—a pure yield trap. In 2018, it all went bust. Earnings loss of 132% forced the REIT to cut the dividend, and recovery is nowhere to be seen.

 

 

REITs to avoid – ARR

 

And we can see the same misery in ARR. The company was founded in 2010 and has had rapid growth. But it was a fake growth spurred by stock dilution and loans. It eventually ended in 2012:

 

 

REITs to consider – MPW

 

Compare the performance of Medical Trust (MPW) with AGNC, ARR, or DHC. You will see a completely different picture. MPW is now a widely hated stock. No one wants it. It was attacked by Hindenburg research and heavily shorted. Many investors must avoid it, citing issues with some of the renters MPW rents their properties. They claimed that MPW is loaning money to their tenants to keep them from defaulting, thus distorting the occupancy and rent income reports. Others argue that MPW is selling their properties to keep their dividends and books in line.

But these were the results of the 2020 Covid distortion, and the company is working hard on improving the situation and their books. The company cut its dividend recently (which it didn’t have to), further enhancing its financial situation.

But if you look at their funds from operations, we saw a decline in 2008 – 2009 (which was obvious) and now in 2023. Anywhere in between, the company was doing great. By 2025, it is expected to have its FFO stabilized and (hopefully) going up again. Nothing has changed for this company, and the recent price decline is nowhere justified. The fair value is around $15 a share, so buying now can provide a significant return.

 

 

REITs to consider – ABR

 

Arbor Realty Trust is less pretty than MPW when looking at their FFO. However, insiders are buying, and their recent operations seem to be picking up (that could be why insiders are buying). Their funds from operations are cyclical. This REIT, unlike MPW, is an mREIT that initiates bridge and mezzanine loans for commercial and residential properties. Many of its loans originate through Fannie Mae and Freddie Mac programs. The company has managed to pay dividends since 2012 (it cut them and stopped paying between 2008 and 2012) and has been increasing them since then. The FFO is shaky, and thus, investing in this mREIT needs to be done with caution.

 

 

REITs to consider – O

 

Realty Income is a darling of all dividend growth investors. All of them have this stock in their portfolios. And if you look at their performance, you will see that this is the best time to add this diamond to one portfolio.

The stock has been overpriced since 2009, with a brief decline in 2019 and today. Buying this stock today may be a decade-long opportunity that will not come again. Like it or not, its FFO jumped up in 2021-2022 after the Covid debacle and is estimated to keep going up. The stock’s fair value is around $51 a share, so buying at the current price or below $51 is a great deal. I doubled my holdings in the last few weeks to grab this opportunity.

 

 

REITs to consider – OHI

 

OHI is another medical REIT providing nice dividend income (current yield is 8.44%), with its price decline unjustified. The stock was undervalued for many years but still offers excellent value and entry points.

 

 

REITs to consider – VICI

 

VICI is another undervalued REIT. The company owns almost the entire strip in Las Vegas (except Bellagio), and their lease contracts are 40+ years in the future. And even if the lease expires, I do not think the current tenants, for example Caesars Palace, would pack their belongings and move elsewhere. So this is a done deal. This REIT is also widely hated and dismissed by retail investors (I do not understand their reasonings) and it is providing great long-term value plus increasing dividends.

 

 

There are many other REITs out there that you should review and consider investing in. But before you do, do your homework and check their price and dividends history. If you need more time, invest only small amounts and regularly. But if you pick some of the gems today, you will avoid making a big mistake.