According to Nareit — the trade association that represents the interests of REITs in Washington — there are more than 225 REITs that trade on a major U.S. stock exchange.
That’s a lot of choices.
Given the dizzying array of options, it’s hard for the average investor to know what divides the haves from the have-nots. A quick stock screen of diversified REITs using Finviz.com suggests there are 23 yielding 5% or more with market caps greater than $1 billion.
And that’s only one sub-sector of the REIT industry. Drill down into all the other areas such as office, retail, etc., and the list of possibilities expands to 60.
While income investors are attracted to REITs because they are required by law to distribute to shareholders at least 90% of the taxable income generated each year, not every REIT is worthy of your hard-earned income.
It might have a shiny 5%-plus dividend yield, but that doesn’t mean you should own it. To cut the wheat from the chaff, I’m going to give you what I believe are the seven REITs to own in good times and bad.
REITs to Own in Good Times and Bad: Simon Property Group (SPG)
When you’re looking for REITs to own in good times or bad, you want stocks that provide income while minimizing risk. That means stable business operations combined with fortress-like balance sheets.
Simon Property Group Inc (NYSE:SPG) is one such company.
Yes, I realize it’s one of the world’s largest mall owners, an area of the economy that struggled mightily in 2017, but things are looking better in retail and Simon’s up to the challenge of transforming the shopping experience to meet the modern consumer.
In Q3 2017, Simon generated $1.04 billion ($2.89 per share) in funds from operations (FFO), 7.0% higher than the $976.0 million from a year earlier. As part of its earnings announcement, Simon upped its quarterly dividend by 12.1% year over year to $1.85.
For fiscal 2017 in its entirety, Simon expects FFO of at least $11.17. That means it’s only paying out 66% of its FFO for dividends. This, coupled with a strong credit rating, should ensure that you continue to get your annual dividend payments of $7.40 per share or more.
Retail is changing but so too is Simon. The mall of tomorrow won’t look anything like the mall of tomorrow.
REITs to Own in Good Times and Bad: Ventas (VTR)
Cafaro runs the Chicago-based healthcare REIT and has since 1999. Since taking the reins of the company, shareholders have received a compound annual total return of 24%, in part by growing the dividend 8% annual during this time.
In 2016, the Harvard Business Review named Cafaro one of the best-performing CEOs in the world. With shareholder returns like Ventas has generated, it’s hard to argue with the magazine.
Trading below $50 for only the fourth time in the past five years, Ventas’ dividend yield is now higher than it’s been in the past decade.
While it’s not expecting to deliver the 2.5% same-store cash NOI it did in 2017, it does see positive growth in all three of its operating segments in the year ahead.
In 2017, it sold just less than $1 billion in assets resulting in $700 million in gains from those assets. In 2018, it expects to make $1.5 billion in strategic dispositions that will result in the increased repayment of debt, further strengthening an already solid balance sheet.
I see no reason that Cafaro’s suddenly going to lose her touch running Ventas. In the meantime, take the 6.4% yield and let her do the heavy lifting.
REITs to Own in Good Times and Bad: Store Capital (STOR)
Warren Buffett, the Oracle himself, bought 9.8% of Store Capital Corp (NYSE:STOR), the single-tenant REIT that specializes in service-type businesses such as preschools, health clubs, pet care facilities, etc.
While courting experiential retail, Store provides triple-net leases whereby the tenant is responsible for all operating costs.
However, what makes it different is that it provides those tenants with the growth capital to expand their businesses becoming not only a landlord but also a funding solution.
Buffett bought his 18.6 million shares at $20.25 each in June. According to his Form 13F, Berkshire Hathaway Inc. (NYSE:BRK.B) still holds every one of them; to date, Buffett’s made about 10% on the company’s investment over the past eight months.
A patient investor, I expect Berkshire Hathaway to hold Store Capital for at least a couple more years.
STOR went public in November 2014 at $18.50 a share. Once it pushed through $20 shortly after its IPO, it’s only fallen below $20 on just two occasions. I’d be buying now and then the next time it drops below $21.
REITs to Own in Good Times and Bad: EPR Properties
It’s not been a good three months for EPR Properties (NYSE:EPR), the Kansas City-based REIT that specializes in the ownership of experiential real estate. Over the last 90 days EPR stock has lost 17% of its value and now trades at the same level as it did in early 2016, erasing two years of gains.
A big reason for the correction?
It generates 37% of its net operating income (NOI) from movie theaters. As anyone who follows the movie business knows, 2017 was not a stellar year at the box office with ticket receipts slightly over $11 billion.
Investors continue to debate whether the movie theater is a dinosaur, given all the streaming video possibilities out there, but when it comes to watching films such as Star Wars, the big screen is the only way to go.
Going to the movie theater is the original experiential experience and while they’re going to have to evolve with the times — I believe they’ll always receive a significant chunk of our entertainment dollars.
The company owns 392 properties in three segments: Entertainment, Recreation, and Education.
Of all of its properties, the 28 Topgolf facilities it owns could be the most intriguing. Golf’s always had a difficulty attracting anyone but the wealthy, so it’s nice to see Topgolf growing its attendance by 30% annually.
As experiences go, Topgolf’s hard to beat on a Friday or Saturday night with friends.
Of all seven REITs mentioned in this article, I would have to say EPR is the one to own for the next 20 years.
Enjoy the 7.7% yield until the markets come to recognize how unique its assets genuinely are.
REITs to Own in Good Times and Bad: Choice Properties (PPRQF)
Living in Canada, I couldn’t resist recommending Choice Properties Real Estate Investment Trst (OTCMKTS:PPRQF). That’s especially true after it just announced it’s paying CAD$3.9 billion for Canadian REIT (OTCMKTS:CRXIF), a REIT with 9 million square feet of retail space in Canada, 10 million square feet of industrial space, and 3 million square feet of office space.
The combined company will become Canada’s largest REIT with an enterprise value of CAD$16 billion and will own 752 properties across Canada with 69 million square feet of gross leasable area.
Loblaw will own 62% of its shares.
However, I only recommend investors familiar with investing in companies outside the U.S., do so, because there are tax implications to take into consideration.
REITs to Own in Good Times and Bad: Hospitality Properties (HPT)
The economy’s pretty healthy at the moment and that means people are traveling more; as a result, owning a REIT that owns hotel properties is a smart way to take advantage of the tailwind in the hospitality industry.
Hospitality Properties Trust (NYSE:HPT) owns 323 hotels with almost 50,000 rooms in 45 states, Puerto Rico and Canada. Of its $9.7 billion investment portfolio, 40% of its hotels operate under brands owned by Marriott International Inc (NYSE:MAR) or InterContinental Hotels Group PLC (NYSE:IHG).
Also, and what makes HPT unique, it also owns 199 travel centers in the U.S. operating under the TravelCenters of America and Petro brands. Given a majority of Americans drive to where they’re going, the $3.5 billion invested in these properties is money well spent.
It pays out just 48.6% of its normalized funds from operations as dividends, leaving plenty of room to pay shareholders in the event of an earnings shortfall.
As for the balance sheet, 75% of its $4 billion in total debt is at fixed rates of interest making it easier to manage any increases in future interest rates.
REITs to Own in Good Times and Bad: InfraREIT (HIFR)
If you’re an income investor, InfraREIT Inc (NYSE:HIFR) is probably one of the most sensible REITs you could own.
HIFR is an externally managed REIT that owns regulated electric transmission and wholesale distribution assets, primarily in Texas. Its asset base has grown from $60 million in 2009 to $1.5 billion today.
As a result of the corporate income tax rate reduction to 21% from 35%, InfraREIT will receive approximately 30 cents less per share in earnings from the assets it leases to Sharyland Utilities L.P.
However, shareholders could see a reduction in taxes paid as dividends were taxed as ordinary income before the enactment of the Tax Cuts and Jobs Act. It could amount to as much as ten percentage points less on your annual tax bill.
At the end of the day, InfraREIT expects to earn non-GAAP EPS of at least $1.25 in 2018 and will continue to pay its $0.25 quarterly cash dividend.
Of all the REITs mentioned, HIFR is the most conservative of the bunch, but be aware that rising interest rates could affect its ability to grow its asset base.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.