Stocks had a great 2021, if a tad wild – the S&P 500 finished up nearly 27% for the year. But the performance of real estate investment trusts (REITs) last year flat-out blew stocks out of the water – no other way to put it.

REITs booked their second-strongest year on record in 2021. The National Association of Real Estate Investment Trusts (Nareit) is reporting green up and down the market, with big REIT indexes turning in anywhere from 41.3% to 43.2% gains. Look a little closer at specific segments, and you see strong performance there, too – mortgage REITs up 22.5% in the commercial financing sector and 11.5% for home financing.

As mouth-watering as those 2021 numbers are, I’m here to look ahead and recommend some of the best REITs to own in 2022.

I’m expecting another fantastic year for these easy-to-own investments and their often attractive yields. And today I’m going to name one I think everyone should own for maximum upside…

REITs Are Moving from Strong to Stronger

Clearly, these investments have posted a strong recovery from the “COVID Crash” lows of March 2020 at the start of the pandemic.

Industrial, self-storage, and data center REITs have been the best performers in the meantime, but even the hardest-hit commercial real estate sectors like hotels, offices, and healthcare have recovered a good deal of the ground that was lost.

But of course, the continuing COVID-19 pandemic and inflation still loom large out there.

There is a great deal of hope that omicron variant of the coronavirus represents the beginning of the virus’ transition from a pandemic global health emergency to an endemic, manageable problem like seasonal influenza. This would speed us down the road to “getting back to normal,” a destination most of us, including yours truly, would love to see sooner and not later. For most of us, that “normal” would include some kind of return to office life.

Right now, according to Kastle Systems, only 27% of office workers are back in the building in major cities across the United States. A less dangerous, more treatable “version” of the coronavirus would allow a much greater percentage of the workforce to get back into the office buildings they abandoned in droves in March 2020 and again in the summer of 2021.

This would be extremely bullish for office REITs. There’s reason for optimism in other REIT segments, too, which means there’s upside.

Hotels have seen recreational travel recover almost entirely, but business travel is still much lower than it was pre-pandemic. Now, it has to be said that some of those travel dollars are lost forever thanks to the explosion of technology that allows us to communicate and work together without even being on the same continent, much less in the same room. Still, there will be some level of recovery which, again, adds up to profits.

The face of retail has changed forever, and we still do not know exactly what the retail real estate world will look like. Brick and mortar sales have recovered from the early days of the pandemic, but e-commerce continues to be a more significant percentage of overall sales. As a result, REITs that have exposure to more internet-resistant stores will do better than traditional shopping malls going forward.

The exception to that statement is Simon Properties Group Inc. (NYSE: SPG). Simon focuses on Class A malls in areas with above-average household incomes; this has been allowed it to be the best-in-class retail mall REIT. SPG shares are trading above $141 right now, despite the broader market sell-off. I’m not really a buyer at this level, but I’m watching closely, and if I see these shares head toward the $130 territory, my tune will change, and I’ll be a buyer all day long – snapping up the 5% yield from this best-in-class REIT.

There’s still some uncertainty in office REITs; we just don’t know yet how much staying power “work from home” has and what that will to do the demand picture. One corner of the office market that will be unaffected – totally – by the looming changes is mission-critical and “headquarters” spaces. They’re unlikely to see much change in demand as the coronavirus goes from pandemic to endemic.

The Best Move You Can Make in This Space Right Now

The name I like best here, and my must-buy recommendation for today, is a new REIT, recently spun off: Orion Office REIT Inc. (NYSE: ONL) is a single-tenant office REIT created by a November 2021 merger. Net lease REITs Realty Income Corp. (NYSE: O) and Vereit Inc. (NYSE: VER) merged to form a large single-tenant retail and industrial REIT. Both had a portfolio of single-tenant office properties spun off to shareholders as part of the merger.

Many owners of Realty Income who found themselves with shares of Orion Office were not interested in owning office REITs. Many were index funds and real estate exchange-traded funds (ETFs) that were not allowed to hold them. As a result, there was a lot of forced, almost totally uninformed selling. When you’re a bargain hunter, like me, looking for good stocks cheap, that kind of selling is what you want to buy into.

From a post-spin-out high of over $31, ONL shares are now trading at around the $16.50 level, almost 50% lower.

Orion has a portfolio of 92 properties around the United States that are 94.4% leased. Most of them are in suburban markets and have high-quality, investment-grade tenants. They have collected 99% of the rents due throughout the pandemic, so they have not had to deal with the cash flow “hiccups” many other real estate sectors experienced. Orion’s top tenants include the U.S. government, Merrill Lynch, Walgreens Boots Alliance Inc. (NYSE: WBA), T-Mobile US Inc. (NASDAQ: TMUS), Cigna Corp. (NYSE: CI), and Teva Pharmaceutical Industries Inc. (NYSE: TEVA).

Getting these tenants to cough up the rent won’t be an issue, no matter what happens in the wider economy. Most of the buildings are leased on a triple net (NNN) basis, so the tenants pay insurance, taxes, and maintenance. The rents Orion collects are therefore pure cream – cash flow.

Orion intends to stay focused on suburban office markets with an initial preference for the Sunbelt states attracting folks fleeing the cities of the Northeast “megaplex.” We are seeing a lot of major corporations follow the workforce, moving headquarters and office campuses out of the more expensive coastal areas inland to cheaper suburban markets.

Now, as it’s only been trading since November, Orion has yet to declare its first dividend. I expect it to pay out around 60% of cash flow, which would give this REIT an extremely attractive yield of about 8.5% – a must-own in the current low-interest rate environment.

— Tim Melvin

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Source: Money Morning