Real Estate

Real Estate Investment Trusts: A Hedge Against Rising Interest Rates

June has been challenging for the real estate market in the context of rising interest rates, and July appears to continue along the same lines, with the Federal Reserve governors hinting at another possible 75-basis-point increase to the federal funds rate. When it comes to dealing with interest rate hikes and inflationary periods, real estate investment trusts (REITs) have historically demonstrated resilience, making them a valuable asset class for investors to consider.

In the world of investing, the old saying “Don’t fight the Fed” holds true in both directions. As the Federal Reserve is looking to combat spiraling inflation through interest rate hikes, it is essential to acknowledge the likelihood that this trajectory will continue until inflation begins to stabilize.

REITs have a particular advantage in this scenario, as they tend to perform well during periods of rising rates. These trusts own and manage income-producing real estate properties and typically derive income from rent and leases. As interest rates increase, operating expenses and overall costs may rise, but so do the rents and leases held by REITs. Moreover, higher interest rates often discourage potential homebuyers from entering the housing market, prompting them to opt for rental properties instead, whether they are houses or apartments.

Historical data supports the idea that during interest rate-hiking cycles, REITs have outperformed the broader market. In fact, during one such cycle, they outperformed the S&P 500 by more than double. This reflects the fundamental strength of the real estate market, where rental properties continue to be in demand even as interest rates rise.

Given the current economic climate, we have identified seven REITs that offer stable investment options with the additional benefit of substantial and reliable dividends. Although these stocks are highly rated by significant Wall Street institutions, it’s essential to emphasize that individual analyst reports should not serve as the sole basis for investment decisions.

Getty Realty (NYSE: GTY)

Getty Realty is a publicly traded, net-lease REIT specializing in the acquisition, financing, and development of retail real estate properties, with a primary focus on convenience and automotive retail. The company boasts an extensive portfolio spanning 38 states and the District of Columbia, serving some of the most densely populated areas in the country. In the first quarter of 2022, the company surpassed Wall Street expectations in terms of income from operations. Shareholders receive a substantial 6.14% distribution.

Iron Mountain (NYSE: IRM)

Iron Mountain is a global leader in secure storage and data management services, offering a range of services such as secure document storage, data management, digital transformation, secure destruction, data centers, cloud services, and art storage. The company plays a vital role in safeguarding and managing critical assets, including sensitive business data, historical artifacts, and more. Iron Mountain also focuses on enabling digital work and supporting business operations. Shareholders benefit from a 5.03% dividend.

These two REITs are just a part of a diversified portfolio of options that can provide investors with a hedge against rising interest rates, making them a wise choice in the current economic environment. Investing in real estate, particularly through the medium of REITs, can provide diversification and stability for investors looking to navigate the complexities of an evolving market.

Remember that investment decisions should be made based on a holistic evaluation of your financial objectives, risk tolerance, and portfolio diversification needs. As always, it’s crucial to consult with a qualified financial advisor to help you make informed investment choices that align with your unique financial goals.

Disclaimer: This analysis is based on the information provided in the Reuters article, and it is important to conduct further research and consider your personal financial situation before making investment decisions.

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