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Reasonable Leverage, Growth Prospects, Moats, and Valuation Guide Our REIT Picks

Our favorites can do well even with potentially higher interest rates.

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Favorable macro conditions including slow and steady economic growth and low interest rates have benefited real estate investment trusts since the downturn, but it is unclear how long these tailwinds will last. Though the recent macro backdrop has delivered a rising tide that lifted many, if not all, REIT boats, we think investors should consider repositioning REIT portfolios to include firms whose cash-flow prospects look attractive, whether or not the favorable macro environment remains in place. Our favorite REITs currently-- HCP (HCP),  Ventas (VTR),  Tanger Factory Outlet Centers (SKT), and  American Tower (AMT)--enjoy reasonable leverage, solid growth prospects, competitive advantages, and relatively attractive valuations, all characteristics that should serve investors well whether or not the macro environment changes.

Though the extent of the impact is debatable, REIT investors generally acknowledge that the macro environment since the economy has emerged from the downturn has been beneficial to commercial real estate owners. The slow and steady growth in the economy has not prompted developer ebullience, which has limited the introduction of new supply into the market. Consequently, the incremental demand from the improving economy has largely accrued to existing landlords in the form of higher occupancies, higher rental rates, and solid same-store net operating income growth. In fact, for some REITs we follow, many portfolio operating and general financial metrics are tracking at or near all-time highs. For large U.S. REITs, same-store NOI growth is near prior peak levels, in aggregate.

Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.