After a cycle of aggressive rate hikes and a year of the current high-rate environment, some investors are beginning to position themselves for potential rate cuts in September. While many real estate investment trusts (REITs) have seen their share prices decline due to the high interest rates, some well-positioned REITs are poised to see significant gains when rates start to come down.
Two REITs that I believe will see the greatest boost when the Fed cuts rates are Alexandria Real Estate Equities, Inc. (NYSE: ARE) and VICI Properties Inc. (NYSE: VICI). Importantly, these REITs don’t need lower interest rates to thrive – their strong balance sheets have allowed them to weather the storm of rate hikes. Instead, their share prices have been affected by overall market sentiment toward the real estate industry because of interest rates and higher treasury yields hurting dividend stocks.
This presents an opportunity to essentially “lock in” high yields before the broader market rushes back in, driving prices up and yields down.
Alexandria Real Estate Equities, Inc. (NYSE: ARE)
Alexandria is a best-in-class life science REIT with a total market capitalization of $20.8 billion. The company has a longstanding track record of developing and operating high-quality properties in prime life science clusters across North America.
Key points:
- Share price down ~6.6% over the past 12 months
- Forward dividend yield of 4.37%, well above its 4-year average of 3.16%
- Strong interest coverage ratio of 6.17x
- 13 consecutive years of dividend growth
Alexandria’s focus on the life science sector, which has shown resilience even during economic downturns, positions it well for future growth. The company’s high-quality tenant base and long-term leases provide stability, while its development pipeline offers potential for future value creation.
VICI Properties Inc. (NYSE: VICI)
VICI Properties is an experiential REIT that owns a portfolio of market-leading gaming, hospitality, and entertainment destinations, including iconic properties on the Las Vegas Strip. The company has a market cap of $32.2 billion.
Key points:
- Share price down ~5.3% over the past 12 months
- Forward dividend yield of 5.38%, above its 4-year average of 4.9%
- Strong interest coverage ratio of 4.17x
- 5 consecutive years of dividend growth
VICI’s portfolio of high-quality, experiential real estate assets provides a stable income stream through long-term, triple-net lease agreements. The company’s diversification into other experiential sectors beyond gaming offers additional growth potential.
Why These REITs Are Poised for a Boost
Both Alexandria and VICI have demonstrated their ability to thrive in a high-interest rate environment, maintaining strong balance sheets and continuing to grow their dividends. Their current share prices, however, reflect the broader market’s cautious stance on real estate due to higher interest rates.
As the Federal Reserve eventually shifts toward rate cuts, these REITs are likely to see significant price appreciation for several reasons:
1. Improved borrowing costs: Lower interest rates will reduce borrowing costs for future acquisitions and developments, potentially boosting profitability.
2. Increased investor demand: As yields on fixed-income investments decline, income-seeking investors are likely to flock back to high-quality REITs, driving up share prices.
3. Expanded valuation multiples: Lower interest rates typically lead to higher valuation multiples for income-producing assets, benefiting well-positioned REITs.
4. Strong fundamental positioning: Both Alexandria and VICI have maintained strong operational performance despite the challenging interest rate environment, suggesting they’re well-positioned to capitalize on more favorable conditions.
Investors who recognize the potential in these REITs now have the opportunity to lock in attractive yields before potential price appreciation reduces those yields. As always, it’s essential to conduct thorough due diligence and consider your individual investment goals and risk tolerance before making any investment decisions.
The information provided in this article is for educational and informational purposes only. It should not be considered financial or investment advice. The author is not a licensed financial advisor, and the content of this article reflects personal opinions and observations. Always conduct your own research and consult with a qualified financial professional before making any investment decisions. Investing in REITs or any other securities involves risks, and past performance does not guarantee future results.
