Real estate investment trusts (REITs) have really taken it on the chin lately. That’s all due to Federal Reserve’s meddling. The reasoning is this: REITs — through their tax structures — are designed to push much of their net income back to shareholders. So, as a result, many REITs feature high dividends. And as a high-yielding security, investors tend to abandon them during periods of rising rates. After all, as the Fed raises interest rates, you can score higher yields on “safer” bonds.
It turns out that reasoning is false, however.
According to Nareit, REITs actually outperform during periods of tightening. And in fact, during the last cycle, REITs managed to gain more than 80%. This is because the rates of dividend and rent growth are often much greater than changes in interest rates. And with that fact in tow, investors are being given a gift to load up on REITs for the long haul.
Here are five top-notch REITs to buy today despite rising rates:
Great REITs to Buy Today #1: Kimco Realty (KIM)
Dividend Yield: 7.4%
Retail REITs have been hit especially hard over the last few months. In addition to facing the Fed’s change in interest rate policies, the sector has been contending with the threat of rising online shopping. However, some retail REITs are made to weather the storm.
That includes Kimco Realty Corp (NYSE:KIM).
KIM is one of the largest owners and operators of open-air shopping centers in the country. All in all, KIMCO owns nearly 500 different strip malls, power centers, and upscale shopping plazas. More often than not, these plazas feature a wide variety of shops, restaurants and retail outlets not necessarily replicated via online means. Not that it matters. Amazon’s (NASDAQ:AMZN) Whole Foods is one of KIM’s biggest tenants.
Even better, KIM has been focusing its efforts in so-called mass affluent suburbs and on more signature series lifestyle centers. These come with higher margin businesses and a steady stream of consumers looking to dine and shop. This focus supports KIM’s continued hefty rate of dividend increases — up 240% since its IPO in the 1990s.
Great REITs to Buy Today #2: Prologis (PLD)
Dividend Yield: 3.13%
For those retail REITs without a strong operating profile, their ever-quickening death is coming at the hands of Prologis Inc (NYSE:PLD). PLD is one of the world’s largest owners of warehouses, industrial and mixed-use space.
Building out an e-commerce future takes a lot of logistic firepower and with people now demanding two-day and express shipping, fulfillment centers need to be pretty much everywhere. That’s been a boon for warehouse and industrial REITs like PLD. Prologis touts major companies such as Amazon and UPS (NYSE:UPS) as key customers.
As these firms have continued to scale up their e-commerce operations, PLD has seen accelerated rent growth. Last year, the REIT managed to see an average of 9% rent growth in the U.S. and 7% across the entire world. Naturally, this rent growth has helped PLD drive continued funds from operations (FFO) growth over the year. This is important as FFO directly translates into how much cash a firm has for dividend payments. And Prologis has consistently delivered on this front.
With online shopping continuing to be a major trend, PLD should have no trouble raising that 3.13% even further.
Great REITs to Buy Today #3: Education Realty Trust, Inc. (EDR)
Dividend Yield: 4.90%
Despite the hardships facing many students these days — such as rising student loans and higher tuition bills — going to college remains as popular as ever. That poses an interesting problem for many colleges and universities. Where are all the students going to stay?
The private sector has stepped up in a major way. That includes building a variety of student housing options near and around campuses as well as directly expanding and taking over dorm operations for many universities. Leading the way is education REIT Education Realty Trust, Inc. (NYSE:EDR).
EDR owns/manages more than 86 different communities across 53 different schools. Typically, those properties are located on/near large tier-one institutions that feature robust student populations. That helps minimize any problems with occupancy. The firm has also begun to focus on higher end student housing- which surprisingly features better occupancy and rent trends than regular student apartments as well as so-called public-private partnerships. This is where EDR will take over dorm operations and upgrades for a school and gain a cut of the profits. Even better is pretty guarantees occupancy.
All of this has benefited EDR in a big way. Profits have continued to rise, while cash flows have remained robust. And like all the REITs on this list, EDR has continued to share the love with its investors. The firm has more than doubled its dividend since the recession.
Great REITs to Buy Today #4: Blackstone Mortgage Trust Inc (BXMT)
Dividend Yield: 7.90%
Not all REITs own physical properties. Some invest in or own mortgages and loans tied to buildings. These are called mortgage REITs (mREITs), and thanks to their “riskier” profiles and ability to leverage, they often yield much more than traditional REITs.
One of the best in the businesses is Blackstone Mortgage Trust Inc (NASDAQ:BXMT).
Using the fixed-income expertise of its private-equity parent Blackstone Group LP (NYSE:BX), BXMT has become one of the better run mortgage REITs in the sector. The firm mostly focuses on senior loans — i.e. having first dibs in the bankruptcy ladder. Secondly, more than 94% of its portfolio is considered floating rate. That means as the Fed raises rates, BXMT will collect more for its loans. And finally, its portfolio is 100% tied to commercial properties and not residential housing.
These three factors create one of the best “sure things” in the entire sector and its premium valuation versus peers reflects this. But with loan origination growing and cash flows/interest payments continuing to rise, the premium valuation for BXMT is worth it.
For investors looking to boost the yield of their portfolios, BXMT’s 7.9% is one of the best ways to added that much needed “oomph.”
Great REITs to Buy Today #5: Public Storage (PSA)
Dividend Yield: 4.08%
One of the biggest winners in the trend towards downsizing and lower homeownership rates has been the self-storage REITs. The fragmented industry is ripe for consolidation and the biggest players continue to use their scale, real-time pricing analytics and ability to raise cheap funds to their advantage. Leading the charge is Public Storage (NYSE:PSA).
PSA is one of the largest owners of self-storage assets in the U.S. and features a whopping 2,300+ properties. The real beauty is that steady demand for its units has allowed it raise rents consistently over the last few years. Even better, thanks to the nature of storage assets, rents can be adjusted upwards quite rapidly. This has resulted in a steady diet of dividend and cash flow increases.
In addition to its continued rent/demand growth, PSA has smartly grown via acquisition. The firm has continued to seek out medium-sized portfolios of storage assets that can be instantly accreditive to its cash flows/earnings. Over the long haul, that’s worked out great for investors.
While PSA’s pace of dividend increases has been lumpy, it continues to reward shareholders with higher and higher payouts.
As of this writing, Aaron Levitt owned no positions in the aforementioned securities.