Due to the nature of their business, real estate investment trusts have a strong appeal to income investors. REITs own income-producing real estate, collect rent from tenants and pass some of that rent to shareholders in the form of regular dividends.
But REITs can deliver handsome capital gains, too.
Check out STORE Capital, which has a large portfolio of investments in over 3,000 properties diversified across 49 states.
On Thursday, the company announced that it has agreed to be acquired by Singapore’s sovereign wealth fund GIC and Oak Street in an all-cash transaction valued at approximately $14 billion.
STORE Capital shares surged 20% on the news.
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Under the agreement, STORE Capital shareholders will receive $32.25 per share in cash, which is 20.4% higher than the stock’s closing price on the previous trading day. The agreement also includes a 30-day “go-shop” period, during which STORE Capital can solicit competing offers.
The transaction is expected to close in Q1 of 2023 if approved by STORE Capital’s shareholders.
This REIT doesn’t make headlines often, but it does have a well-known investor: Warren Buffett. As of June 30, Buffett’s Berkshire Hathaway held 6,928,413 shares of STORE Capital.
Note, that this is not the first time for deep-pocketed investors to gobble up a publicly traded real estate company. In June, Blackstone completed its $5.8 billion acquisition of rental apartment owner Preferred Apartment Communities.
If big asset managers are making significant moves into the space, retail investors might want to pay attention.
Here’s a look at two REITs that Wall Street finds particularly attractive at the moment.
Realty Income (O)
Realty Income is a REIT with a portfolio of over 11,000 properties that are under long-term lease agreements.
Its top tenants include big names like Walmart, CVS Pharmacy, and Walgreens — companies that have survived and thrived through thick and thin.
In fact, the REIT claims that it collects around 43% of its total rent from investment-grade tenants. A diversified, high-quality tenant base allows Realty Income to pay reliable dividends.
Moreover, while most dividend-paying companies follow a quarterly distribution schedule, Realty Income pays its shareholders every month.
The stock currently yields 4.7%.
Jefferies analyst Jonathan Petersen has a ‘buy’ rating on Realty Income and a price target of $78 — roughly 23% above where the stock sits today.
W. P. Carey (WPC)
W. P. Carey is another generous dividend-payer from the REIT space. The company recently raised its quarterly dividend rate to $1.061 per share, which translates to an annual yield of 5.1%.
To put things in perspective, the average S&P 500 company yields just 1.6% at the moment.
Those dividends are backed by a portfolio of 1,357 properties totaling approximately 161 million square feet. The company has invested in industrial, warehouse, office, retail, and self-storage properties subject to long-term lease agreements with built-in rent escalators.
While the broad market is deep in the red year to date, W. P. Carey shares are actually up about 3% in 2022.
Raymond James analyst RJ Milligan expects the trend to continue. The analyst has an ‘outperform’ rating on W. P. Carey and a price target of $95 — implying a potential upside of 14% from the current levels.
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