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The Federal Reserve’s seventh consecutive interest rate hike this month, coupled with recession warnings, has caused the real estate market to cool down swiftly after blooming over the last two years. Real estate is still one of the best alternative assets to invest in, particularly as prices have been correcting over the past year. As the bearish stock market trends continue, investing in fundamentally sound real estate investment trusts (REITs) might be rewarding.
What Are Specialty REITs?
As the name suggests, specialty REITs cater to certain exclusive property types such as student housing, prisons, cell towers, senior housing and entertainment centers, including movie theater chains and casinos. Properties that cannot be otherwise categorized into traditional REIT sectors are labeled as specialty REITs.
Benefits of Specialty REITs
High returns: Certain specialty REITs such as student housing and cell towers are recession resistant and are always in high demand regardless of the market backdrop. Because of the high year-round demand, most specialty REITs generate handsome market-beating returns.
Unique portfolios: Specialty REITs own and manage a distinctive set of properties, thereby providing diversification benefits. Several new and emerging specialty REITs such as cannabis facilities have been gaining traction as state governments take active steps to legalize marijuana.
Risks of Specialty REITs
Oversupply: Because of the lower cost of maintenance of certain specialty REITs such as student housing, many real estate companies aim to capitalize on this opportunity. But this can lead to significant vacancies and lower profit margins.
High operating costs: Senior housing facilities, cannabis manufacturing centers and prison systems require significant capital investment and have high operating costs. Also, specialty REITs focusing on cannabis facilities must comply with the laws and regulations set forth by federal and state agencies.
How to Invest in Specialty REITs
You can invest in publicly traded specialty REITs through an online stock broker. Units of REITs are traded on national stock exchanges from 9.30 a.m. to 4 p.m. EST on weekdays. A multitude of mutual funds and exchange-traded funds (ETFs) also invest in REITs.
Largest Specialty REITs
CoreCivic Inc.
CoreCivic Inc. (NYSE: CXW) is the largest prison, correctional and detention center in the U.S. The specialty REIT has ties to the government dating back almost 40 years.
CoreCivic has been taking steps to reduce its outstanding debt amid the Fed’s hawkish stance. The REIT paid off $250 million worth of outstanding debt as of Sept 30 and repurchased more than 5%, or 6.6 million, outstanding shares as part of its latest capital allocation strategy.
But occupancy-related challenges put in place during COVID are still there. CoreCivic President and Chief Executive Officer Damon Hininger said, “We believe our operating and capital allocation strategies have positioned us well to return to earnings growth once the transition at our La Palma Correctional Center is complete, which we expect to occur near the end of this year, and as the remaining occupancy restrictions caused by the pandemic are removed.”
EPR Properties
EPR Properties (NYSE: EPR) is one of the largest entertainment REITs, with an investment portfolio of over $6.6 billion. As of Sept 30, it owns and operates more than 173 movie theater properties, 11 ski properties and 57 eat-and-play properties, among others.
The REIT has charted steep growth in the fiscal third quarter because of strong demand for outdoor leisure and entertainment activities. Its revenue increased by 15.4% year over year, while adjusted funds from operations (AFFO) rose by over 32%. EPR Properties pays $3.23 as dividends annually, translating to an 8.16% yield.
Industry Overview
| Number of REITs | 7 |
| Average Dividend Yield | 4.91% |
| YTD Total Return | 6.86% |
| August Total Return | -2.10% |
| 2023 Total Return | -0.78% |
Quarterly Performance Data
| Financial Metric | Q2 2023 | 2023 YTD |
| FFO ($M) | $332 | $731 |
| NOI ($M) | $1,360 | $2.932 |
| Dividends Paid ($) | $443 | $919 |
Investing in Specialty REITs
Specialty REITs are some of the most diverse real estate investment options with the potential to generate significant returns. According to Nareit, specialty REITs, on aggregate, surged nearly 6.7% in November, compared to the benchmark S&P 500 index’s 4.79% decline. While there is considerable risk associated with such unique real estate investments, they are good alternative investment assets.
Frequently Asked Questions
Are specialty REITs a good investment?
Yes, specialty REITs are a good investment option.
How do specialty REITs do in a downturn?
Specialty REITs are typically recession-proof and deliver stable returns even in volatile market backdrops.
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