The stock market has performed exceptionally well in the past couple of years, with the S&P 500 producing a total return of nearly 50% between 2023 and 2024. In fact, the S&P 500 reached a fresh all-time high on the day this article was written.
However, there are some areas of the stock market that haven't performed quite as well, and that's especially true when it comes to real estate investment trusts, or REITs. Real estate has been one of the worst performing parts of the stock market over the past few years -- not necessarily because the businesses in this sector aren't doing well, but because REITs are some of the most interest rate-sensitive stocks in the market.
Higher interest rates affect REITs in a few major ways. Most obviously, they increase the cost of borrowing, and most REITs rely on borrowed money to grow. Second, higher yields on risk-free investments, like Treasury bonds, mean investors expect higher yields on other investments, such as commercial real estate. Since price and yield have an inverse relationship, higher yields put pressure on the value of commercial properties that REITs own.
Two in particular that look attractive right now are Realty Income (NYSE: O) and Ryman Hospitality Properties(NYSE: RHP). And now could be a great time for long-term investors to buy at a discount.
Realty Income's stock price and its business tell two different stories
Realty Income(NYSE: O) is one of the largest REITs in the United States and specializes in net-leased properties. A net-lease property is generally occupied by a single tenant and has a lease structure whereby the tenant agrees to pay for property taxes, building insurance, and most maintenance items. As of the latest information, Realty Income owns about 15,500 properties, and about 80% of its rental income comes from retail businesses.
This is a company that's designed for steady income and growth over time. Even though it has high exposure to retail, most of Realty Income's tenants are in businesses that are recession resistant, or that aren't vulnerable to e-commerce disruption. Dollar stores, warehouse clubs, and convenience stores are three of the company's major property types.
Realty Income reached an all-time high in early 2020, just before the COVID-19 pandemic began. Shares are about 35% below that level now. But the business results don't tell the same story. In the roughly five years since that peak, Realty Income's funds from operations (FFO, the REIT equivalent of earnings) has increased by about 22% on a per-share basis. And there's also an argument to be made that the company's balance sheet and overall business strength are significantly improved as well.
Over the long run, the true power of Realty Income's compounding model has become apparent. Since it went public in 1994, Realty Income has produced 14.1% annualized total returns for investors, and that includes the slump of the past few years. If the Federal Reserve continues to gradually lower rates over the next few years, it could be a big tailwind for Realty Income.
Ryman could have lots of room to grow in 2025 and beyond
Ryman Hospitality Properties is one big exception to the real estate sector's underperformance. In the 2022-2023 period, when rates were rising rapidly, Ryman actually gained about 26%, versus a slight decline for the S&P 500 in the same period.
The short explanation for its performance is that Ryman's business has proved to be surprisingly resilient. The company invests in large-scale, group-focused hotels, primarily under the Gaylord brand name. It was thought that the COVID-19 pandemic would create lasting pressure on things like conventions and conferences, but the exact opposite has been the case. In fact, over the past three years, Ryman's average daily rate for future bookings has increased by 30%.
Not only that, but the company's entertainment business has also been growing rapidly, and Ryman is investing heavily in adding new rooms and amenities to its properties, as well as in value-adding renovations. In fact, Ryman just recently announced plans to add 108,000 square feet of meeting space to its flagship Gaylord Opryland property.
It isn't hard to see why Ryman is making these investments. In the third quarter of 2024, the most recent to be reported, Ryman generated its highest third-quarter operating income ever and booked more than 581,000 future room nights.
Ryman's stock has retreated by about 15% from its recent highs, making this a good opportunity to take a closer look at this high-potential business.
Buy for the long term
I don't necessarily think it will be "too late" to buy these stocks later in 2025 or beyond. But if interest rates continue to fall and these businesses continue to thrive, it could end up being too late to buy them on sale. I own both REITs in my portfolio and have for a while -- more than a decade in Realty Income's case -- and I hope to own shares of these fantastic businesses for decades to come.
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Matt Frankel has positions in Realty Income and Ryman Hospitality Properties. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Ryman Hospitality Properties. The Motley Fool has a disclosure policy.
