Around 25% of my Stocks and Shares ISA is taken up with Real Estate Investment Trusts. That’s quite a large portion, but I think that the REITs I own will do well as investments.
Today, there are three on my radar that I’ll possibly start buying or buy more of for passive income in 2023 and beyond. They’re solid, steady businesses that I think will continue to generate good returns.
REITs
I think that 2023 can be a good year for REITs. But I think that some have better prospects than others.
Data centres, for example, use a lot of energy and contain a lot of equipment. That makes them expensive to maintain, which I think could be problematic in 2023.
I’m also staying away from warehouse buildings, since the news that Amazon is looking to rent out some of its excess space. That gives me concern about oversupply.
Instead, I’m looking for specific REITs that I think can generate steady, reliable rental income. And there are three that are on my agenda at the moment.
Each is focused on properties in the US. And each leases its properties on a triple net basis.
This means that the costs of operating and maintaining the buildings are taken on by the tenants. The landlords just collect the rent.
In my view, this makes them desirable businesses to own at any time. But this is especially true in a recession, when consistent cash flows are especially valuable.
Federal Realty
Top of my list of REITs to buy is Federal Realty Investment Trust. The company’s portfolio is made up of retail properties.
The biggest risk with retail-focused REITs is the rise of e-commerce. More online shopping might well weigh on demand for retail space.
In my view, Federal Realty is vulnerable to this but has better protection from the threat than its competitors. Its properties are situated in densely-populated locations.
This means that companies looking to reduce their retail footprint are likely to close other outlets first. That’s why I think its 4% dividend yield looks good for years to come.
Four Corners
I’m also looking at Four Corners Property Trust. This company owns and leases restaurant buildings.
The company’s tenant base is somewhat concentrated, with 54% of its portfolio occupied by Darden Restaurants. That concentration presents a risk of a sort.
Four Corners has been diversifying its tenant base, though. And its 5% dividend is supported by impressive occupancy and rent collection metrics.
Occupancy rates have consistently been above 99% and rent collection metrics have been similarly high. As such, I think it can be a reliable source of passive income in 2023.
Realty Income
Last on my list is Realty Income. Unlike the other REITs on my list, the company pays its dividends monthly.
Realty Income is another retail-focused REIT. It attempts to protect itself from the threat of e-commerce by focusing on quality tenants in sectors immune to disruption.
This has proved successful in the past. The company maintains some of the highest occupancy and rent collection statistics in the industry.
With a company the size of Realty Income, there’s a danger that it will find it difficult to grow its portfolio in a recession. But with a 5% dividend, I think that risk is already priced into the stock.
