Real estate stocks remain a popular choice for income-oriented investors. Such companies usually operate as real estate investment trusts (REITs). The firms can escape income taxes related to operations by paying at least 90% of their income in the form of a dividend. Hence, this arrangement benefits company and stockholder alike.
Still, the overall economy wields a great deal of influence over real estate stocks. This clout relates to more than mere boom and bust cycles. For example, online shopping has hammered retail REITs while boosting industrial REITs. Technology has brought up the market REITs centered around data centers or telecom towers.
The REIT market also has to deal with rising interest rates. Since real estate purchases are usually financed, rising interest costs almost always have a negative impact on REITs. However, opportunity remains, and these real estate stocks should serve investors well amid economic change and rising rates:
Digital Realty Trust, Inc. (DLR)
When one stores data in “the cloud,” the servers storing this data actually rest on terra firma. That server could reside in a facility owned by Digital Realty (NYSE:DLR). Digital Realty leads the industry among a newer class of real estate stocks, data center REITs. It operates 205 data centers in 11 countries across four continents. The needs for these facilities include a reliable power supply, air-cooled chambers and strong physical security.
Analysts forecast double-digit growth in the cloud industry for years to come. This will fuel the demand for Digital Realty properties regardless with happens on interest rates. Analysts estimate that cloud will become a $186.4 billion industry this year. By 2021, they expect the industry’s size to reach $302.5 billion.
The need for data center real estate will grow along with that. This will bolster the net income of DLR stock. Analysts predict that profits will grow by 28.3% this year and 7.9% the next. As such, the dividend has reflected this increase. The payout has risen for 13 straight years. The stock now pays an annual dividend of $4.04 per year, yielding about 3.6%.
Given the growth of the cloud, these increases should continue. As more industries turn to the cloud for their storage, DLR stock will continue to grow as more companies turn to Digital Realty to shelter and power their data centers.
Physicians Realty Trust (DOC)
Physicians Realty Trust (NYSE:DOC) already benefits by operating in the recession-proof healthcare industry. However, it will enjoy a further benefit thanks to demographics. Every day, an estimated 10,000 Americans age into Medicare as baby boomers reach their 65th birthday. This has increased the demand for both senior housing and healthcare.
This demand will bring doctors and patients into their medical offices. Moreover, this sector remains underrepresented by the REIT sector. REITs own only about 15% of an estimated $1.1 trillion worth of medical office real estate. This makes it one of the better opportunities in real estate stocks. The industry will benefit from both a growing demographic and the increasing size of the medical office REIT industry.
Revenue and profits reflect this growth. In its most recent quarter funds from operation (FFO) earnings came in at 28 cents per share. This represents a 16.7% increase year-over-year. Further, analysts predict 21.7% profit growth for 2018. They also expect net income to rise by an average of 9.7% per year over the next five years.
Physicians Realty also maintains a steady dividend. It has paid 23 cents per share in dividends every quarter since its June 2017 payout. This brings the dividend yield to just under 5.5%. Given the profit growth, that will likely have to increase soon. Either way, both demographic trends and the growth of the medical office REIT industry favor DOC stock.
EPR Properties (EPR)
Specialty REIT, EPR (NYSE:EPR) acts as an anomaly among real estate stocks. It operates in three different sectors — entertainment, education, and recreation. Or schools, movie theaters and ski resorts. Most retail REITs which have suffered as more shoppers move online. However, the businesses that lease EPR’s properties face little vulnerability from online competition.
Also, most of EPR’s property types operate in recession-proof industries. Fewer customers may go to ski resorts as interest payments take a bigger bite out of family budgets. However, the movie theaters and schools should be relatively unaffected by higher interest rates.
Although analysts expect slower growth this year, they also expect net income to rise by an average of 7% per year for the next five years. Revenue growth also continues with the company poised to bring in 13.5% more revenue this year than it did in 2017. These same analysts forecast 6.2% revenue growth for 2019.
The company also stands out by paying dividends monthly — 36 cents per share. This translates to an annual yield of about 6.3%. Although EPR’s current P/E comes in at 22.5, I think many investors will ignore that to earn the monthly dividend. Given this high monthly dividend and its relative protection from higher interest rates, EPR stock should continue to serve as a profitable long-term income vehicle.
Independence Realty Trust, Inc. (IRT)
Independence Realty (NYSE:IRT) owns and manages apartment complexes across the Midwest and Southeast. Higher interest rates serve as a mixed blessing for real estate stocks of its type. On the one hand, funding expansion becomes more expensive. However, apartment demand also rises as fewer buyers enter the housing market.
Also, IRT’s markets should help it to maintain stability. It operates exclusively in either low or moderate-cost markets. Hence, most of its units rent at price points that renters should be able to pay regardless of how the economy performs. Also, the company tends to buy properties in metros experiencing some growth. This also includes high-growth markets such as Dallas or Orlando.
While it trades near all-time highs, the stock price has seen little movement since its IPO five years ago. Hence, the primary benefit to owning IRT stock revolves around its dividend. Although the company switched to paying quarterly dividends, it still pays investors 72 cents per share annually. This translates to a yield of about 6.8%.
This dividend has remained the same for years. However, IRT has paid extra dividends at times to meet the 90% payout requirement. With an average growth rate of 5% per year expected over the next five years, I predict more dividends increases will come over time. Although this stock will not please growth investors, income investors should do well with IRT stock.
Public Storage (PSA)
People usually want to hold onto their things, but secular trends such as higher interest rates tend to increase the demand for smaller living spaces. Enter Public Storage (NYSE:PSA).
Public storage holds the largest market share in the self-storage industry. It owns or manages about 2,400 facilities. This is more than 900 more buildings than its nearest competitor, Extra Space Storage (NYSE:EXR). In 2017, PSA also earned more than double the revenues of EXR.
Concerning PSA stock, new buyers may have also gained an opportunity. The stock has fallen by over 14% from its July highs. Concerns about overbuilding and competition in the industry have sent the stock’s value down. As such it now trades at about 27 times forward earnings. While this may appear high, analysts predict net income to grow by an average of 17% per year over the next five years.
The company also pays $8 per share in annual dividends. That brings the yield to around 4%. Although this dividend has not increased since 2016, the dividend shows a long-term trend of periodic hikes. The overbuilding fears could continue to pressure PSA stock for a time. However, with all of the trends driving this equity, I believe the solid dividend and the underlying fundamentals will continue to benefit Public Storage in the long run.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.