The specter of rising interest rates has finally coming to a head for a variety of high-yielding asset classes. Among the victims? Master limited partnerships (MLPs), plain ol’ utility stocks … and especially hit hard have been real estate investment trusts (REITs).
Last month, as the Federal Reserve toyed with raising rates, the FTSE NAREIT all-REITs Index sharply fell 4.71%, more than knocking down the prior quarter’s 4.05% gains.
But here’s the thing: REITs can do OK in rising-rate environments. Really.
According to data provided by Morningstar, via Columbia Threadneedle Investments, REITs do feel rising interest rates immediately. However, that knee-jerk reaction eventually fades, and performance rebounds quite sharply. Columbia shows that over the 21 periods of time since 1980 when interest rates rose by at least 50 basis points, the FTSE NAREIT All Equity REIT Index managed to return an average of 16% over the next 12 months.
Translation? The current selloff (as well as the one we’ll see when the Fed actually does raise rates) should be used as buying opportunities by anyone looking for suddenly cheaper sources of income.
With that in mind, here are seven REITs to buy soon.
REITs to Buy: Health Care REIT, Inc. (HCN)
Dividend Yield: 4.6%
Americans keep living longer, but they also require more medical services to do so. And more medical service equals more medical real estate.
There’s a whole subsector of REITs dedicated to medical real estate, and Health Care REIT, Inc. (NYSE:HCN) is the largest and most well-established of them.
HCN owns and operates 1,384 doctor’s offices, hospitals, assisted living facilities and other medically related properties across the U.S, the U.K. and Canada. That wide swath of medical properties is set to profit from the “graying” of the developed world, such as in the U.S., where baby boomers continue to age and retire.
What’s great about HCN’s portfolio is that roughly 87% of it is funded by private sources, not the federal government. Medicare and Medicaid set limits on how much an operator can charge a patient for assisted and senior lifestyle space; not so in the private sector.
For the latest quarter, HCN managed to realize a year-over-year increase in funds from operations (FFO, an important REIT metric) as well as robust same-store net operating income (NOI) growth.
In short, Health Care REIT was able to charge more people more money for its services.
HCN now pays 82.5 cents per quarter in dividends, representing roughly 20% growth in its payout over the past five years.
REITs to Buy: Realty Income Corp (O)
Dividend Yield: 4.7%
Here’s a big number: 537. That’s the number of consecutive times that Realty Income Corp (NYSE:O) has paid its monthly dividend. That translates to 46 straight years of dividend payments, including 70 consecutive quarters where Realty Income has boosted that payout.
Driving that dividend prowess is the REIT’s massive portfolio of freestanding real estate. Realty Income owns and operates more than 4,300 properties across 49 states and Puerto Rico. These freestanding properties include everything from convenience stores and restaurants to movie theaters and automotive parts & services centers.
What’s more is that this property is all triple-net leased. That means that tenants — not Realty Income — pay the taxes, maintenance and other fees associated with renting the property. That reduces the REIT’s burden with regards to its portfolio and allows O to distribute more cash to investors.
Realty Income saw its FFO increase by 4.7% from a year earlier during the first quarter, and as its frequent increases (including this quarter’s 2.6% bump) indicate, O certainly is distributing more and more cash to shareholders.
REITs to Buy: Iron Mountain Inc (IRM)
Dividend Yield: 5.2%
At first blush, Iron Mountain Inc (NYSE:IRM) might not sound like a typical REIT. The firm is the leading provider of document storage, data backup services and other archival resources.
The key is just how Iron Mountain stores those documents.
Other companies rent space inside IRM’s massive network of underground salt caverns and other facilities to store their documents — just like you’d rent an apartment. Those caverns are irreplaceable pieces of infrastructure, and considering how much that structure resembles an apartment complex, Iron Mountain was able to secure a private-letter ruling from the IRS and become a REIT.
That’s great news for income investors, who now enjoy a 5%-plus dividend on their IRM shares.
And Iron Mountain still has plenty of growth to go. The REIT has moved heavily into digital data storage and cloud services. Additionally, IRM has undergone a global transition — recently buying out Australian-based document storage company Recall Holdings Ltd. Recall has a similar business model and will drive IRM’s global strategy.
IRM might be a weird REIT, but it could be a lucrative one nonetheless. And it looks a little less frothy after roughly 7% declines over the past few months.
REITs to Buy: UDR, Inc. (UDR)
Dividend Yield: 3.3%
While buying a home seems to be getting easier, for many Americans, renting still is the best or only option.
To that point, apartment REIT UDR, Inc. (NYSE:UDR) might be one of the best options around.
UDR owns and operates 48,086 apartment homes among its various communities and buildings. And like many REITs, the key isn’t just the size of the portfolio, but the quality of that portfolio.
The vast bulk of UDR’s portfolio is located in high-income, high-demand metro areas including Boston, L.A., New York City and Washington, D.C. This quality of portfolio allows UDR to charge higher rental rates than, say, an apartment operator in Cleveland. That puts it in the key position to profit from the continued high cost of living in these areas, as well as their continued economic growth.
As such, UDR has managed to deliver some pretty good results and dividend growth for its investors over the longer term. The firm’s recent dividend payout at the end of April was the 170th in a row and represented a 7% increase from the year-ago period’s number. Moreover, UDR’s payout has grown roughly 55% over the past five years.
REITs to Buy: CBL & Associates Properties, Inc. (CBL)
Dividend Yield: 5.8%
A lot has been written about the death of shopping malls and how online shopping is destroying the traditional in-store experience.
That might be true for some malls in less-than-prime areas, but in growing parts of the country, malls, community centers and “power centers” (larger strip malls with a few big-box tenants) continue to see foot traffic.
Shopping plaza REIT CBL & Associates Properties, Inc. (NYSE:CBL) is one way to invest here. CBL is one of the largest mall REITs in the United States and owns, holds interests in or manages more than 140 properties.
Again, portfolio is key. CBL’s holdings include many of the dominant enclosed malls and open-air centers for several cities and regions. And while it hasn’t developed any new enclosed malls in quite a while, CBL has moved into building more power centers and lifestyle centers. These areas — full of shopping, dining and entertainment options — continue to be the shopping destination for choice for many Americans.
Ultimately, building what consumers want in areas that can actually afford to use them will drive CBL’s cash flows and dividends into the future. CBL’s payout has increased more than 30% over the past five years, and shares currently are yielding close to 6%.
REITs to Buy: Boston Properties, Inc. (BXP)
Dividend Yield: 2%
Office REIT Boston Properties, Inc. (NYSE:BXP) pays out 65 cents per quarter, which actually results in a pretty low headline yield of 2%.
But with Boston Properties, there’s a lot more to the story.
For one, BXP’s portfolio quality is second to none in the space. You’re paying a premium for these assets because they’re worth it.
Boston Properties owns roughly 175 properties concentrated in five markets: Boston, New York, Princeton, San Francisco and Washington. Those five areas weathered the Great Recession better than most, and have continued to see economic growth since. As such, these premier properties continue to be in high demand.
For example, BXP is currently winding down its lease deal with New York’s iconic FAO Schwarz Toys store. When Boston Properties re-leases the space to another tenant, it’s possible that it could get more than $3,500 per square foot in rent.
These kinds of massive rents will deliver steadily growing cash flows. Already, Boston Properties has raised its full-year FFO guidance for 2015 to $5.35-$5.45 per share, up from only $5.28 per share.
And the other part of BXP’s story? For the past two years, BXP has paid out massive special dividends in January. While BXP yields some 2% based on its regular payouts, if you include the $4.50 special payout at the end of 2014, you’re looking at a yield of roughly 5.3%.
These special dividends came as a result of asset sales, so this isn’t to say you should expect special dividends from here on out. Instead, take it as a sign of good faith that BXP management has shareholders’ interests in mind.
REITs to Buy: Vanguard REIT Index Fund (VNQ)
Dividend Yield: 3.7%
Considering how many quality REIT choices investors have, the best play might not be any single play, but a broad approach instead.
The easiest way to do this? An exchange-traded fund (ETF) like the Vanguard REIT Index Fund (NYSEARCA:VNQ).
VNQ tracks the MSCI US REIT Index, which covers roughly two-thirds of the U.S. REIT market, including retail, office, residential apartment and industrial properties. VNQ holds a total of 141 high-class REITs (including all the picks on this list).
It also should be noted that VNQ has no mortgage REIT exposure and is strictly a “physical” building REIT fund.
The broad portfolio of REITs minus the riskier mREITs has served investors well over the long term. As of the end of Q1 2015, VNQ has managed an average annual total return of 10.21% since inception in 2004 — better than the S&P 500 by a couple percentage points. That can be chalked up almost entirely to VNQ’s healthy dividends.
Best of all, as a Vanguard fund, VNQ charges rock-bottom expenses of just 0.1%, or $10 per $10,000 invested.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.