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If you asked the typical investor which two sectors led the charge in November’s big stock rally, few would come up with the right answer.

The sector everyone would assume correctly that led the pack is technology, with a 13% gain. But the second sector—with a 12% rise—would not only come as a huge surprise but also outpaced the 9% jump in the S&P 500.

And there’s still time to get in. Let’s take a look…

Wall Street Loves REITs Again

It was real estate. Yes, real estate investment trusts (REITs), which have been beaten down by surging interest rates and economic uncertainty, are now showing signs of strength. The big upward move was fueled by bets the Federal Reserve may begin cutting interest rates early in 2024. The pullback in Treasury yields supported trader optimism that the worst of the interest rate environment has passed.

A Bloomberg article related that one believer in the sector is Bank of America, which is overweight real estate going into 2024. It says that while the real estate sector still lags behind the broader market year-to-date, the group may be a bright spot heading into 2024.

Norah Mulinda of Bloomberg reports that BofA’s Jeffrey Spector called the REIT sector the stock market’s “diamond in the rough.” He listed Americold Realty Trust (COLD), Empire State Realty Trust (ESRT), Kimco Realty (KIM), Prologis (PLD), and Welltower (WELL) as among his top picks in a note to clients on December 1.

Spector explained the logic behind his recommendation of the REIT sector.

Worries over commercial real estate (CRE), and specifically office-related stocks, have placed a pall on the REIT sector as a whole, though offices only represent a sliver of the overall group. Investors have fled the office sector due to fears of remote work’s impact on office occupancy and elevated borrowing costs. “Real estate has seen the biggest de-rating since 2021 among all industries on concerns over office, but office is less than 5% of real estate’s market cap,” Spector said. REITs ended October at their lowest level since March 2020.

REITs do appeal to me because they are so beaten down. I’d rather own something at a good value than chasing some AI high-flyer that may be profitable one day.

So let’s look closer at one of Spector’s picks, Welltower.

Stay Healthy with Welltower

Welltower is an REIT that invests in healthcare facilities offering skilled nursing, assisted living, independent living and specialty care services, and medical office buildings. The company’s investments are primarily real estate properties leased to operators under long-term operating leases or financed with operators under long-term mortgages.

As of the end of 2022, Welltower had real estate investments totaling $34.14 billion, consisting of over 142,000 senior housing and wellness units and approximately 23 million square feet of outpatient facilities in most U.S. states, the U.K., and Canada.

The company’s health should continue to improve as the lingering effects of the pandemic fade away. For example, I see continued signs of improved market conditions for seniors housing operating conditions into 2024, with occupancy gains and improved pricing power.

Favorable supply/demand conditions have started to emerge within senior housing as construction has slowed due to increased funding costs (higher interest rates) and supply chain issues. In addition, favorable demographic trends—such as an aging population and rising healthcare spending—are in place, leading to increasing demand for Wellcare’s facilities.

The best healthcare real estate providers stand to disproportionately benefit from the Affordable Care Act (ACA). There is an increased focus on higher-quality care in lower-cost settings benefiting the best owners and operators in the industry—like Welltower, which should see demand funneled to them.

Keep in mind, too, that the baby boomer generation is in its senior years. The 80-and-older population, which spends more than four times on healthcare per capita than the national average, should almost double over the next 10 years.

Welltower will benefit from these industry tailwinds because of its portfolio of high-quality assets connected to top operators in the senior housing, skilled nursing facilities, and medical office buildings segments. The company has spent years forming and developing relationships with many of the top operators in each segment. These relationships allow Welltower to push revenue-enhancing initiatives and cost-control efficiencies at the property level, creating net operating income growth above the industry average. It also provides a pipeline of acquisition and development opportunities to meet the needs of its growing operating partners.

Add it all up and Welltower is a superb REIT, with tremendous growth opportunities.

I believe it’s a buy anywhere below $90 for income investors, even though its current yield is only 2.72%. It will be in the growth portion of an income portfolio. The stock is actually trading near a 52-week high and is up 35% year-to-date!

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