Investors should consider owning real estate investment trusts (REITs) amidst broader concerns that the US economy is headed for a recession, says Kevin Brown, a senior Morningstar analyst.
“Real estate is showing up as a bright spot because the 10-year Treasury yield has come down,” he said in a recent interview with CNBC.
REITs are known to pay a healthy dividend yield that makes up for a great reason to invest in them ahead of a potential economic slowdown.
In particular, the Morningstar analyst is bullish on two real estate investment trusts for this year: Realty Income and Healthpeak Properties.
Realty Income Corp (NYSE: O)
Kevin Brown recommends investing in Realty Income ahead of a potential recession because it’s a dividend aristocrat, which means it has increased its dividend each year since the turn of the century.
Realty Income went through the global financial crisis and the COVID pandemic without having to cut its dividend. So, this time is not very likely to be any different, according to the Morningstar analyst.
More importantly, Brown remains positive on Realty Income as it’s trading at a deep discount of up to 25% compared to its fair value, he told clients in a research note on Friday.
Realty Income counts notable names like 7-Eleven and Dollar General among tenants. In Q4, the San Diego-based REIT reported better-than-expected revenue of $1.34 billion even though its EPS missed consensus by a cent.
Note that Realty Income stock currently pays a lucrative dividend yield of 5.68%. “O” is currently up nearly 10% versus its year-to-date low in early January.
Healthpeak Properties Inc (NYSE: DOC)
Kevin Brown dubs Healthpeak Properties an exciting investment proposition for 2025 as health-care REITs have done well in recent years and are broadly expected to build on that momentum moving forward.
“They have gone from not just recovering from the pandemic but they have also seen very strong growth as the boomer generation ages into the target demographic for the sector,” he argued in a recent report.
Prominent names Healthpeak counts as tenants include Hayden Research Campus and Dallas base Baylor University Medical Center.
On Friday, the Morningstar equity analyst recommended buying Healthpeak Properties at current levels as demand for lab space from pharmaceutical companies will likely remain in place even if the US economy slides into a recession.
“Healthpeak is offering stable NOI growth that isn’t exciting, but all of a sudden when sectors start looking at decelerating NOI growth, stable looks attractive,” he added.
DOC is a dividend stock that currently yields an even better 5.96%. Plus, it’s roughly flat for the year at the time of writing, so the valuation is quite attractive as well, Brown concluded.
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