The long stretch of historically low interest rates may have benefited real estate more than any other sector. Cheap debt has a direct impact on cash flow, which means more capital to grow and more cash to distribute to shareholders.
The flip side is that low interest rates resulted in record-high inflation. Inflation grew from 7.5% in January 2022, to 7.9% in February and the latest report shows an 8.5% increase in March, the fastest rise since December 1981.
Experts believe the latest consumer price index (CPI) report suggests inflation is finally hitting its peak, but the cool-down period could be long.
While the entire real estate sector tends to be a good hedge against high inflation, certain strategies are likely to fare better while costs remain high.
One strategy is to look at REITs that can be nimble when it comes to adjusting rents to keep up with the market. Investors have traditionally favored long-term leases, but inflation has been rising at a higher rate than what most rent escalation clauses will allow.
The other play is to focus on strong, but safe, income. Dividends offer returns regardless of what a REIT’s share price is doing in the short-term, but it’s important to look at REITs with the ability to maintain dividends.
Here are three REITs worth checking out to hedge against continued inflation:
CubeSmart (NYSE: CUBE) Self-Storage properties usually have month-to-month leases, allowing operators to react quickly to changing costs and market demand. When it comes to self-storage REITs, CubeSmart stands out as being in the best position to withstand economic turbulence and take advantage of growth opportunities.
While CPI climbed an alarming 7% in 2021, CubeSmart’s full-year 2021 same property NOI increased 17.2% on rental rate and occupancy gains. The company’s core FFO also increased 23% for the year to $2.12 per share.
VICI Properties (NYSE: VICI): This gaming REIT has become a real powerhouse since stepping onto the scene in late 2017. The company recently acquired the iconic Venetian Las Vegas and is now set to acquire MGM Growth Properties (NYSE: MGP) which will put it in the running to be one of the 10 largest equity REITs in the country by market cap.
One could understand a REIT with so much focus on growth having a less than stellar balance sheet, but VICI currently has a 6.8x fixed rate coverage and a low 2.8x net debt to EBITDA ratio while maintaining a reasonable FFO dividend payout ratio of around 80% while currently offering a yield of 5.12%.
1st Streit Office: Don’t feel bad if you haven’t heard of this one. 1st Streit Office is a public, non-traded REIT offered through the Streitwise platform. The REIT’s share price is tied directly to its net asset value (NAV).
Since shares of the REIT aren’t traded on a major stock exchange, a market selloff has little to no effect on the price. This means greater protection for the retail investors’ portfolios in case of a market downturn.
The REIT has maintained an 8.4% dividend yield for the past eight consecutive quarters and is one of the best value options currently available, considering most publicly traded REITs are currently priced at a premium to their NAV.
An investment in a non-traded REIT is best suited for those who are comfortable with long-term investments. Since shares can’t be sold on the stock market, there are limited liquidity options available within the five-year investment term.
Another Option: Until recent years, publicly traded REITs were the only option for most individuals to invest in real estate without having to purchase an entire property. The emergence of real estate crowdfunding has changed that and private equity real estate investments are now available to virtually anyone.
Find news, alerts and an up-to-date directory of current real estate investment offerings on Benzinga Alternative Investments.
Photo by Adam Winger on Unsplash
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