3 real estate stocks to buy before the bear market ends

Real estate investment trusts (REITs) are often considered a good hedge against inflation, which often moves independently of the broader market. Not so much for now.

The pool of these income-producing properties is down about 28% year-to-date, compared to about 20% year-to-date. S&P 500according to MSCI US REIT IndexBut it’s also a buying opportunity for those who tend to sift through the 225 or so listed REITs for trusts with promising portfolios that appear oversold.

For me, those include the three I currently hold. digital reality (DLR -0.36%), Alexandria Real Estate Stocks (that is 1.42%)When Teleno Realty (TRNO 0.71%)Each operates a different business, including data centers, life science facilities, and warehouse space, but they share some traits, including an ongoing bear market hit.

This chart shows how badly these three stocks have been selling since the beginning of the year.

Data from YCharts.

Stock price potential while enjoying the flow of dividends

A REIT must pay at least 90% of its taxable income to its shareholders. This means REITs typically don’t have a lot of cash on hand and usually need to issue new shares or borrow money to finance expansions. Now, with rising interest rates and falling markets making these options less acceptable than usual, each of these his REITs faces industry-specific market concerns.

But they also share the potential for the stock to rise significantly when the market arrow points north. That’s in no small part because each is a well-run company with solid performance records built on portfolios serving growing markets in their respective areas of expertise.

Digital Realty, for example, is one of the largest of all REITs, operating hundreds of large data centers around the world. Alexandria is a pioneer in life sciences office space, leasing facilities to major biopharmaceutical companies and leasing thousands of facilities at joint campuses across the country. Terreno is a small warehouse specialist who plays a key role for logistics clients in six major coastal markets. .

They are also reliable providers of dividend income. This chart shows that these three of his REITs have consistently paid yields at levels above the larger market, represented in this case by Vanguard. S&P 500 ETFs:

TRNO dividend yield data by YCharts.

FFO and dividend growth are also points to consider when purchasing

Funds from operations (FFO) for each of these stocks also look good. Digital Realty forecasts $6.75 to $6.85 per share, a key metric for 2022. But with a cash flow-based payout ratio of 42%, which is very modest, this REIT looks poised to build on his record of 17 consecutive years of dividend increases.

Meanwhile, Alexandria Real Estate Equities has increased its dividend for the 11th year in a row, with a payout ratio of about 56% based on cash flow and FFO performance, and the company recently increased to its midpoint of $8.41 per cent. I was. Easily sustainable.

Next, Terreno’s 12-month FFO per share was $2.94, the highest since its listing in 2010. This REIT has also increased its dividend for 11 years in a row, with a payout ratio of about 85%. Based on cash flows that fall within the range of a typical REIT.

Target price indicating “moderate buy” sentiment

Then there are the analysts’ words. They gave Digital Realty a target price in the range of $90 to $145 and a consensus of $145, which would jump the stock price by about 50% from its current price of about $96.

For Terreno, take $54 to $79 and consensus to $67.90. That could be up about 28% from the current stock price of about $53. Meanwhile, Alexandria Real Estate Equity has a target price range of $140 to $186, with a consensus of $173.20, up 30% from his current level of about $132 per share.

All three were rated as “reasonable buys”, which reflects my own sentiments. Given the moat surrounding their business, the solid demand for future space, the ability to increase their holdings while raising rents at least somewhat, and the consistently increasing passive income stream, these stocks are reasonably priced. , especially now that the bear market has taken such a toll on their stock prices.