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2 Top REIT Stocks to Buy in January

CEO Khai Intela
Real estate investment trusts (REITs) have faced challenges in recent years due to rising interest rates. However, there are still opportunities for investors looking to generate income. Instead of settling for a CD with a...

Real estate investment trusts (REITs) have faced challenges in recent years due to rising interest rates. However, there are still opportunities for investors looking to generate income. Instead of settling for a CD with a fixed yield, consider investing in REITs like Alexandria Real Estate Equities (ARE) and Kilroy Realty (KRC) that offer the potential for increasing dividends over time.

Alexandria owns a very special type of office

Alexandria stands out among office REITs because of its unique focus on medical research facilities. While other office landlords primarily own traditional office spaces, Alexandria's portfolio includes a combination of laboratory and office spaces, catering to the specialized needs of the medical research industry. This niche property type has a strong demand, as evidenced by Alexandria's impressive occupancy rate of 93.7% and rental rate increases of around 33% in the first three quarters of 2023.

Despite the market's failure to fully recognize Alexandria's specialized assets, the company's performance remains strong. The stock currently trades at a 40% discount from its 2020 value due to the pandemic's impact on traditional office properties. However, Alexandria recently increased its dividend, indicating its resilience. With a modest funds from operations (FFO) payout ratio of around 55%, the company has substantial room for adversities without compromising its distribution. Moreover, the current dividend yield stands at around 4%, near a 10-year high, even after a recent rally in the stock price. Investing in Alexandria offers an opportunity to swim against the current and potentially reap the rewards.

ARE Chart Alexandria's stock performance (Source: YCharts)

Kilroy is right in the thick of it

Kilroy Realty primarily focuses on traditional office spaces, with a growing exposure to medical research assets. Although the work-from-home trend has impacted the office sector, Kilroy's vacancy rate of 14% outperforms the market average of 19%. The company is known for operating modern, well-located assets with attractive amenities. These A-rated properties are sought after by businesses and their employees, positioning Kilroy favorably in times of economic uncertainty. Even during prosperous periods, demand remains high due to the vibrant technology regions it serves.

Despite a recent stock rally, Kilroy's dividend yield of 5.4% is still significantly lower than pre-pandemic levels. However, the shares are currently more than 50% below their pre-pandemic value. This suggests that Wall Street is starting to recognize the company's resilience and the quality of its assets. With a robust FFO payout ratio of just under 50% in the third quarter, Kilroy is well-positioned to weather challenges and deliver steady returns.

Still well off the highs

Both Kilroy and Alexandria present attractive investment opportunities as they trade well below their pre-COVID-19 high-water marks. These office REITs have demonstrated resilience during this challenging period, making them appealing options for value-seeking investors. While risk-averse individuals may exercise caution, those willing to take a contrarian view stand to benefit from the potential value offered by these stocks as the broader REIT sector makes a recovery.

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