The past couple of years have been tough on the real estate investment trust (REIT) sector. Rising interest rates increased their borrowing costs. On top of that, higher rates weighed on the value of REIT share prices to push up their dividend yields. Those higher yields were necessary to compensate investors for the companies' higher risk profiles compared to lower-risk yield-focused investments like bank CDs and bonds.
However, that headwind should fade this year as the Federal Reserve starts cutting rates. That catalyst should drive up shares of most REITs. On top of that, several REITs have specific factors that could power additional upside. Prologis(NYSE: PLD), Mid-America Apartment Communities(NYSE: MAA), and EPR Properties(NYSE: EPR) stand out for their potential to soar in 2024 and beyond.
Supply headwinds should start fading
Shares of Prologis have lost a quarter of their value from their peak in 2022, pushing its dividend yield up to 2.7%. In addition to rising interest rates, the industrial REIT has been under pressure on concerns that demand for warehouse space would slow. While that's happening, it's slowing from a blistering pace to a more normalized environment.
The REIT still hasn't fully captured the surging rent growth from prior years due to the long-term nature of its leases. Because of that, it expects its same-store net operating income (NOI) to grow at a high-single-digit rate over the next few years. Meanwhile, its core funds from operations (FFO) per share should rise even faster.
Prologis expects 2024 to be a strong year. One factor driving its optimism is the expectation that warehouse completions will peak this year and start falling. With new supplies starting to finally dwindle after a post-pandemic building boom and demand expected to strengthen as interest rate concerns fade, Prologis' stock could rebound sharply in the coming months.
Rent growth should start accelerating
Mid-America Apartment Communities (MAA) has lost about 40% of its value from the peak, driving up its dividend yield to 4.3%. That's due to rising rates and growing new apartment supply. That supply growth caused rent growth to slow from its blistering pace.
However, apartment rents have continued to rise at a decent rate across MAA's markets. The company's average effective rent per unit was up 4.5% in the third quarter on strong average occupancy (95.7%). That helped drive solid same-store NOI growth of 4.1% in the period.
On the one hand, MAA expects supply pressures to persist for the next few quarters as its markets absorb all the new apartment developments on track to start leasing up. However, CEO Eric Bolton sees a light at the end of the tunnel. In the third-quarter earnings release, he noted, "The volume of new apartment starts has begun to decline, and we expect that leasing conditions will be supportive of higher rent growth in late 2024 as markets absorb the current development pipeline." Meanwhile, with a strong balance sheet, the company has the financial flexibility to pursue new growth opportunities that are starting to emerge. These catalysts could drive its shares a lot higher in the coming quarters.
Its problems are finally in the past
EPR Properties' troubles date back to the pandemic. The REIT focused on experiential properties has lost 45% of its value from its peak due mainly to issues with its theater tenants. As a result, its monthly dividend now yields 7.4%.
However, those issues are now in the rearview mirror. The company has collected most of the rent it deferred during the pandemic. Meanwhile, it restructured its lease agreement with one of its top theater tenants (Regal) after its parent company went bankrupt. That new deal provides a solid base rental rate with upside potential from a blockbuster year at the box office.
Because of that, the weight should finally start lifting on EPR's stock price this year, especially as interest rate headwinds fade. That should enable the REIT to ramp up its investment volume to grow faster. It has already secured $235 million of experiential development and redevelopment projects it expects to fund over the next two years (all of which it can finance internally). Better market conditions would enable it to invest even more to grow its rental income faster in 2024 and beyond.
Lock in these higher yields while they last
Interest rates and other headwinds have weighed on the share prices of Prologis, MAA, and EPR Properties over the past few years. However, those headwinds should fade this year. Because of that, now looks like a great time to buy these REITs while their dividend yields are higher. That positions investors to potentially earn high total returns as their stock prices recover.
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Matthew DiLallo has positions in EPR Properties, Mid-America Apartment Communities, and Prologis. The Motley Fool has positions in and recommends Mid-America Apartment Communities and Prologis. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
