One of the primary reasons investors tap real estate investment trusts (REITs) and the related ETFs is due to the above-average dividend yields typically found on these assets.
That trait also makes real estate stocks rate-sensitive. Investors often embrace these stocks and ETFs as replacements for bonds. In what could be good news for the ALPS Active REIT ETF (REIT ) and other REIT funds, market participants appear to be secure in wagering on the Federal Reserve cutting rates in September.
REIT’s 30-day SEC yield of 3.60% isn’t alarmingly high, but it is 25 basis points higher than the dividend yield found on the S&P Real Estate Select Sector Index. Plus, REIT is actively managed. This implies that if interest rates fall, fund managers can more rapidly add high-dividend exposure than index-based counterparts. As things stand today, the ETF is already home to some of the more venerable dividend payers in the real estate sector.
REIT Gets It Right with Dividends
Among real estate sub-groups, triple-net REITs look attractive from the perspectives of both valuation and dividend growth and sustainability. One triple-net name that could be a standout is REIT holding Realty Income (O).
The stock has lagged over the past two years due to the Fed’s tightening cycle. However, Realty Income made a series of astute acquisitions in 2022 and 2023. This bolstered its portfolio in the process. While acknowledging that Realty Income is the triple-net name that is most rate-sensitive, Morningstar analyst Kevin Brown said “the negative impact of interest rates on the company has been overblown.”
Office REITs have endured their share of headwinds since the onset of the coronavirus pandemic. Still, the group shows opportunity. For example, Morningstar is constructive on Kilroy Realty (KRC), which accounts for 2.23 of REIT’s portfolio.
“We recognize the uncertainty surrounding the future of office real estate and believe that the environment will remain challenging for office owners in the near to medium term,” according to Morningstar. “That said, we also believe the selloff has been overdone and the market is not recognizing the value of the company’s non-office-related assets and land bank. Kilroy has a high-quality portfolio with an average building age of 11 years, compared with 34 years for other office REIT peers.”
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