Real estate stocks and the related exchange traded funds are performing notably better than the broader market this year, despite rising interest rates.
Just look at the ALPS Active REIT ETF (REIT). Entering the April 28 trading session, REIT held a year-to-date advantage of more than 800 basis points over the S&P 500. That’s a testament not only to the defensive traits of the real estate sector, but REIT’s active management as well.
Speaking of the benefits of REIT being an actively managed fund, it’s home to some stocks that real estate analysts are bullish on. Take the case of Realty Income (NYSE:O), which is a triple-net REIT, meaning that its tenants are responsible for the maintenance of the properties.
“And so, Realty Income just sits back and collects a simple rent payment from them without having any major expenses, and it makes it a very safe stable business, and even in recessions their cash flows are not changed very much because they have such a wide cushion between what the operator, the tenants’, cash flows are versus the rent payments, that their rent payments are never at risk of being potentially cut,” says Morningstar analyst David Harrel.
Realty Income, which accounted for 3.4% of REIT’s portfolio at the end of last year, is primarily known for owning retail properties, but it’s diversifying its client base. Earlier this year, the real estate company said that it is acquiring the real estate assets of Encore Boston Harbor from Wynn Resorts for $1.7 billion. That venue is widely viewed as New England’s glitziest casino-hotel.
Harrel is also constructive on healthcare REIT Ventas (NYSE:VTR). Ventas owns healthcare centers, life sciences real estate, and senior housing facilities.
“One of the things that we like about them is that they do have their life science and their medical office portfolios, which were not impacted by the pandemic and generally should be relatively defensive during most recessions,” adds the Morningstar analyst. “Medical office is a portfolio that just should continue to grow at 2% to 3% every year and is insulated from most economic impacts. Life science is a sector that should have a significant growth ahead of it, as many pharmaceuticals continue to invest in their overall research capabilities and many universities are expanding their research campuses."
Ventas represented 3.14% of REIT’s portfolio at the end of 2021, according to issuer data.
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