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. The consumer price index unexpectedly hit an 8.6% annual increase in May, after April's 8.3% rise left most investors believing inflation was starting to cool off.
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. Especially when the REIT has CPI protection built into its leases. 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:
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 MGM Growth Properties, and was just added to the S&P 500 index.
One could understand a REIT with so much focus on growth having a less than stellar balance sheet, but VICI currently has a 7.1x fixed rate coverage and a low 3x net debt to EBITDA ratio while maintaining a reasonable FFO dividend payout ratio of around 80% while currently offering a yield of 4.7%. The company has long-term triple net leases with some of the largest casinos in the world. These leases also have clauses that allow for rent to be increased annually based on 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.
ReatyMogul Income REIT: This is one of RealtyMogul’s two non-traded REIT offerings. The Income REIT was created to provide consistent income to investors through its monthly dividend payments. The REIT currently has a portfolio of debt and equity investments in multifamily, office and retail properties across the United States.
The Income REIT has a dividend yield of 6% and has produced total returns of 14.8% over the past 12 months. The nature of non-traded REITs means the growth is sustainable through virtually all market cycles and is likely to outpace inflation by a wide margin.
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.