New York, NY – When economic conditions undergo significant changes, new opportunities and challenges emerge for different asset classes. In 2022, the Federal Reserve’s decision to raise interest rates quickly affected rate-sensitive asset classes more than others, particularly those unable to easily pass on increased costs to customers.
One asset class heavily impacted by rising interest rates was equity Real Estate Investment Trusts (REITs). Factors such as changes in work dynamics leading to obsolete office spaces and heightened duration factors exerted pressure on REIT valuations. The relationship between future cash flows and interest rate changes played a key role in magnifying the impact on REIT prices.
As illustrated in a comparison of the broader REIT market to the S&P 500, the REIT market significantly lagged behind post the Fed’s rate hikes in 2022. However, this lag created opportunities for savvy REIT investors as multiples across the board became more attractive due to capital movement away from the REIT market.
Two REITs in particular, W. P. Carey Inc. and Realty Income Corporation, stood out as undervalued by the market. W. P. Carey’s decision to simplify its structure and focus on industrial and warehouse properties led to a reduced dividend but a more strategic approach to growth. Despite the negative market reaction, W. P. Carey’s strong balance sheet and attractive valuation metrics presented a compelling opportunity for investors.
Similarly, Realty Income Corporation faced market scrutiny due to declining multiples despite consistent growth in underlying funds from operations (FFO) and strategic acquisitions enhancing the business. Market misunderstanding of Realty Income’s exposure to European and UK markets, along with its strong fundamentals, led to the stock trading at a low multiple, making it an appealing prospect for investors.
Both W. P. Carey Inc. and Realty Income Corporation offer strong fundamentals and robust capital structures, with the market undervaluing their potential. Investors bullish on these REITs foresee attractive dividend yields and potential for significant upside as market conditions evolve.
