Helped by the Federal Reserve’s two recent interest rate cuts, totaling 75 basis points, REITs and the related exchange traded funds have found solid footing.They could be poised for more upside in 2025.
Take the case of the actively managed ALPS Active REIT ETF (REIT ) is higher by almost 2.5% in the current quarter and nearly 11% year-to-date. Because the Fed’s September rate cut was its first in four years, plenty of real estate equities remain attractively valued.
For investors that don’t want to stock pick in the group, the good news is that some of the sector’s most attractive bargains are also REIT member firms. The ETF could be a valuation-effective avenue for market participants willing to bet on a 2025 real estate resurgence.
REITs (and REIT) Have Solid Valuation Case
Among the ALPS ETF’s holdings that look appealing on valuation is Americold Realty Trust (COLD). It operates warehouses that are filled with temperature-sensitive products. Think chemicals, food, and pharmaceuticals. That implies a solid level of client diversity. After a rough stretch, Americold’s fundamental picture is improving.
“Fundamentals have recovered in recent quarters as food manufacturers continue to ramp up production and supply chain issues and labor shortages abate. We think that Americold will continue to grow its market share in a rapidly consolidating industry and should be able to achieve mid-single-digit net operating income growth in the upcoming decade,” noted Morningstar analyst Suryansh Sharma.
Hotel REIT Host Hotels & Resorts (HST) is another example of a REIT holding that trades at attractive multiples with a decent fundamental outlook, which includes limited competitive vulnerabilities by way of Airbnb.
“We think the company should continue to see solid growth in the years ahead as this segment eventually returns to normal by 2027. Combined with cost efficiencies achieved through renovations completed during the pandemic, we think this will lead to permanently higher operating margins,” observed Morningstar’s Kevin Brown.
Realty Income (O), another REIT holding, trades at a deep discount to Morningstar’s fair value estimate and it the landlord has a fairly diverse tenant roster and lengthy history of boosting its payout.
“Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors,” added Brown.
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