Real estate investment trusts (REITs) are a popular choice for investors looking to gain exposure to real estate. Known for their attractive dividend yields, REITs have become a favored option among income-focused investors. However, the Fed's high interest rate regime over the past two years has posed challenges for REITs.
Now, with the Fed hinting at a potential rate cut in next month’s policy-setting meeting, the outlook for this sector is starting to brighten once again. In fact, in a recent technical analysis note, Oppenheimer pointed out a bullish reversal in the Real Estate Select Sector SPDR (XLRE), which is up 8.1% YTD, and 16% over the past three months.
The brokerage firm upgraded its rating on the REIT sector to "market weight," and highlighted their favorite stocks within the group for investors looking to add exposure. Ahead of expected rate cuts from the Fed, here are three high-yield picks to consider.
REIT #1: Digital Realty Trust
Texas-based Digital Realty Trust, Inc. (DLR) connects businesses to the heart of the digital world, offering a comprehensive range of data center, colocation, and interconnection solutions through its global PlatformDIGITAL. With over 300 facilities spanning more than 50 metro areas across 25-plus countries, Digital Realty is valued at $46.7 billion by market cap.
Shares of Digital Realty have gained 15.6% over the past 52 weeks, and are up about 12% on a YTD basis.
On Aug. 7, Digital Realty announced a quarterly dividend of $1.22 per share, set to be distributed to shareholders on Sept. 30. This brings the company’s annualized dividend to $4.88 per share, offering shareholders a 3.26% yield.
Digital Realty reported its Q2 earnings results on July 25, which revealed a mixed picture. While the company’s reported revenues of $1.4 billion missed Wall Street’s forecasts, its core funds from operations (FFO) of $1.65 per share narrowly edged past Wall Street’s estimates.
The company nearly doubled its cash reserves during Q2 to $2.3 billion from $1.2 billion recorded at the end of March 2024. As of June 30, the data center REIT held $16.3 billion in total debt, predominantly unsecured, with a solid net debt-to-adjusted EBITDA ratio of 5.3x and a fixed charge coverage of 4.1x, reflecting its prudent financial management.
Commenting on the Q2 performance, CEO Andy Power said, “We have returned our balance sheet to below-target leverage levels and broadened our capital sources to capitalize on the global opportunity we see for data center infrastructure.”
For fiscal 2024, management forecasts total revenue between $5.6 billion and $5.7 billion, while adjusted EBITDA is anticipated to land between $2.8 billion and $2.9 billion. Additionally, the company expects core FFO per share for the entire year to range between $6.60 and $6.75.
Analysts tracking Digital Realty project the company’s FFO to increase 0.9% year over year to $6.65 per share in fiscal 2024 and rise another 6.6% to $7.09 per share in fiscal 2025.
Overall, Wall Street is optimistic, with a consensus “Moderate Buy” rating for DLR stock. Of the 24 analysts covering the stock, 14 advise a “Strong Buy,” one advocates a “Moderate Buy,” eight give a “Hold,” and the remaining one recommends a “Strong Sell.”
The average analyst price target of $158.36 indicates a potential upside of 5.2% from current price levels. The Street-high price target of $188 suggests that DLR could rally as much as 24.9% from here.
REIT #2: Lamar Advertising
With a market cap of roughly $12.6 billion, Louisiana-based Lamar Advertising Company (LAMR) dominates North American outdoor advertising with a staggering 360,000 displays across the U.S. and Canada. Specializing in everything from billboards to transit and airport ads, Lamar helps brands of all sizes reach expansive audiences daily.
Over the past 52 weeks, shares of Lamar have rallied 36.1%, overshadowing the broader S&P 500 Index’s ($SPX) 25.1% gain during the same time frame. On a YTD basis, LAMR is up 17.3%.
The company declared a quarterly dividend of $1.40 per share on Aug. 27, scheduled for distribution to its shareholders on Sept. 30. This results in an annualized dividend of $5.60 per share, offering a 4.52% yield for investors.
Lamar announced its Q2 earnings results on Aug. 8, which blew past Wall Street’s estimates. The company reported Q2 net revenues of $565.3 million, up 4.5% year-over-year, thanks to robust local and regional advertising demand. Lamar’s adjusted FFO of $2.08 per share rose 9.5% annually and topped analysts’ estimates by a 3.5% margin.
During the quarter, the company’s free cash flow rose 27.8% year over year to $203.5 million. As of June 30, Lamar boasts a robust total liquidity of $744.3 million, comprising $666.4 million ready for borrowing from its revolving senior credit facility and $77.9 million in cash and cash equivalents.
Looking ahead to fiscal 2024, Lamar reaffirmed its full-year guidance for adjusted FFO, indicating it remains on track to meet the upper end of its previously projected range of $7.75 per share to $7.90 per share. By comparison, analysts tracking Lamar expect the company’s bottom line to hit $7.75 per share in fiscal 2024, up 3.8% year over year.
LAMR stock has a consensus “Moderate Buy” rating overall. Out of the four analysts in coverage, one suggests a “Strong Buy,” and the remaining three recommend a “Hold.”
The average analyst price target of $127 indicates a potential upside of just 2.3% from the current price levels. The Street-high price target of $140 suggests that LAMR stock could rally 12.7%.
REIT #3: Tanger Inc
North Carolina-based Tanger Inc. (SKT) stands out as a premier owner and operator of outlet and open-air shopping destinations. With a portfolio of 38 outlet centers, one adjacent managed center, and one open-air lifestyle center, Tanger offers more than 15 million square feet of retail space in 20 U.S. states and Canada.
Since going public in 1993, this REIT has built a portfolio featuring over 3,000 stores from more than 700 brands. The company’s market cap currently stands at $3.3 billion.
Shares of Tanger have outperformed the broader market over the past 52 weeks, delivering a 28.9% gain. So far in 2024, SKT has advanced 9.2%.
On Aug. 15, the company paid its shareholders a quarterly dividend of $0.275 per share. This results in an annualized dividend of $1.10 per share, yielding 3.64%.
Tanger revealed its Q2 earnings results on Aug. 1, which surpassed Wall Street’s expectations. Total revenue of $129 million shot up 16.7% year over year, fueled by healthy leasing and rental activity during the quarter. Revenue from the company’s rental division surged 7.4% annually, while revenue from leasing services jumped 9.9%. Tanger’s core FFO of $0.53 per share improved 13.8% year-over-year.
The company boasts a solid financial position with $20.2 million in cash and short-term investments as of June 30, plus a hefty $585 million available on its $620 million unsecured lines of credit, ensuring plenty of financial flexibility.
Reflecting on the Q2 performance, CEO Stephen Yalof said, “With our strong balance sheet and liquidity, including no significant maturities until late 2026, we have the flexibility to remain opportunistic and continue to unlock embedded value for our stakeholders."
Encouraged by the strong Q2 performance, management raised its core FFO per share outlook for fiscal 2024 to a range between $2.05 and $2.12. Analysts tracking Tanger expect the company’s profit to climb 6.6% annually to $2.09 per share in fiscal 2024, and grow another 4.8% to $2.19 per share in fiscal 2025.
Overall, SKT stock has a consensus “Moderate Buy” rating. Out of the eight analysts in coverage, three suggest a “Strong Buy,” and the remaining five recommend a “Hold.”
While the stock trades nearly flat with its average analyst price target of $30.71, the Street-high price target of $33 suggests upside potential of 8.6% for SKT.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
