Despite the evidence that real estate investment trusts (REITs) actually do well during periods of tightening, the sector has been hit particularly hard as the Federal Reserve has ratcheted-up rates. Over the last six months, the Vanguard Real Estate ETF (NYSEARCA:VNQ) is down by roughly 5%. That decline plays into the idea that when rates rise, REITs fall before snapping back. The only problem is market volatility has prevented the snap-back.
That’s left plenty of big-time and high-yielding bargains in the sector.
And with the rising market volatility, the Fed may be stepping off the brakes. Already, Chairman Jerome Powell has turned a bit dovish and the lack of inflation means that the Fed doesn’t need to tame the economy like it was doing. For investors, this could be the go-ahead for many high-yielding sectors, including REITs.
With that, here are five REITs to buy that could run-up big for the rest of the year.
Digital Realty Trust (DLR)
Dividend Yield: 3.79%
There’s no denying that the world continues to become more digital. Technology has invaded our lives like never before. And all of that, from cloud computing to mobile commerce, requires one thing. And that’s tons and tons of server computers. The problem is owning specialized buildings and all that necessary hardware to keep them running is a very expensive proposition for many firms. This is especially true for smaller startups.
That’s where Digital Realty Trust (NYSE:DLR) comes in.
DLR owns over 195 data centers across the globe. Here, the REIT hosts firms’ web and cloud services, keeps the data centers cool and running smoothly, then sits back and collects a fee from its tenants. Those tenants include a who’s who of some of the largest corporations on the planet. Top customers include AT&T (NYSE:T), Snap (NASDAQ:SNAP) and Oracle (NASDAQ:ORCL).
The continued need for more data hosting has only benefited DLR over the long run. Since 2005, Digital Realty’s core funds from operations — the key metric of a REIT’s health — has grown at a CAGR of 13%. Those gains have led to 13 years’ worth of dividend increases. Today, DLR yields close to 4%.
With the future becoming more tech-focused, DLR could be one of the best REITs to hold for the long haul.
Dividend Yield: 5.23%
If technology adoption is one of the biggest trends out there, then rising healthcare demand could be another. Our population continues to get larger and older as new drugs and therapies keep us alive. It stands to reason that more healthcare demand will require more places to provide care. Some of the best opportunities for investors could be with those firms that own all the real estate related to hospitals, doctors’ offices, senior living facilities, etc.
Ventas, Inc. (NYSE:VTR) is an elder statesmen of healthcare REITs.
VTR owns roughly 1,200 different medically related buildings. The best part is that Ventas doesn’t really deal with any of the regulation, drug pricing or costs related to healthcare. It simply owns the hospital building. That frees it from all the hassles that come along with medicine. Even better is that VTR has pivoted its portfolio toward life science and research, partnering with some of the largest medical schools/labs in the country. This provides it with high rents and long leases.
All in all, VTR’s focus has allowed it to scale-up and provide plenty of dividend growth and returns for investors. Since 2001, Ventas has been able to grow its dividend by 8% annually. Today, VTR yields a healthy 5.23%.
Given the continued demand for healthcare, REITs like Ventas have plenty of opportunities to keep growing over the long haul. For investors, VTR stock makes a great addition to any portfolio.
Extra Space Storage, Inc. (EXR)
Dividend Yield: 3.76%
Americans have a lot of stuff. The job of providing a place to stash our Christmas decorations, R.V.s and vintage beanie babies falls to a subset of REITs that own self-storage facilities. At first glance, REITs like Extra Space Storage, Inc. (NYSE:EXR) seem pretty boring. That is until you realize the sheer amount of growth behind them.
EXR has benefited from the last recession in spades and America’s housing crisis. For starters, the trend toward downsizing has created a real space crunch for many people. People are buying smaller homes and many retiring Baby Boomers are looking to cash out the equity in the residences. But still, they are keeping much of their possessions. Secondly, while credit trends have improved, it’s still pretty hard to buy a home in many areas. This has created a nation of renters. Extra Space Storage and its rivals have capitalized on this trend in a big way.
The REIT owns a whopping 1,606 different self-storage facilitates across the country. And EXR continues to expand that portfolio via smart acquisitions. Most of the sector is owned by mom & pop operators, so there are plenty of opportunities to scale up. In doing that, Extra Space has steadily managed to grow its FFO and operating revenues. Since 2006, FFO at EXR has managed to surge by more than 600%. That beats the pants off its rivals.
With strong annual dividend growth and continued high occupancy, EXR could be one of the top REITs to own over the next few years.
AvalonBay Communities Inc. (AVB)
Dividend Yield: 3.27%
Speaking of the nation of renters, demand for apartments, townhomes and other multifamily units has continued to surge. So much so, that rents are expected to surge by more than inflation once again in 2019. This has been a boon for apartment REITs like AvalonBay Communities Inc. (NYSE:AVB).
AVB owns 84,490 apartment homes, making it one of the largest landlords in the entire country. Moreover, it has been pruning its portfolio and adding new construction to some of the fastest/strongest areas of the country. Today, the vast bulk of its holdings exist in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest and Northern and Southern California. This has allowed Avalon to see strong occupancy rates and rent growth over the last few years. For the first three quarters of 2018, rents have grown by more than 2.4% — a number that even beat AVB’s own projections. This has naturally translated to strong FFO and dividend growth for the REIT.
Since its IPO, AVB has managed to grow its dividend by an average of 5.3% per year. That’s not shabby at all considering the sheer size of the firm and the number of apartments it owns. All in all, that dividend growth as well as capital appreciation has managed to produce a steady 13% annual return for investors in the REIT.
And given the trends in leasing and renter growth, there’s no reason why AVB can’t keep the streak going.
iShares Core U.S. REIT ETF (USRT)
Dividend Yield: 4.46%
Given the sheer number of bargains among REITs today, a broad approach may be best. And you can’t get better than the iShares Core U.S. REIT ETF (NYSEARCA:USRT). In its short history, the ETF has proven to be a winner for investors.
USRT tracks the FTSE NAREIT Equity REITs Index, which is one of the gold standards when it comes benchmarking the sector. The ETF owns more than 150 different large- and mid-cap REITs. This extensive coverage includes exposure to industry stalwarts like Simon Property Group Inc (NYSE:SPG) and Boston Properties, Inc. (NYSE:BXP). It also hits all the main property types: apartment buildings, medical, offices, retail, etc. That comes all within one ticker. What it does not include is so-called mortgage REITs, which own paper and loan money to builders and developers.
This broad exposure makes USRT a perfect way for investors to add REITs to their portfolio.
Performance for the fund has been pretty good as well. Over the last ten years, USRT has managed to produce an 11.35% average annual return. With nearly $1 billion in assets, swift trading volume and a low 0.08% expense ratio, USRT makes a great addition to play the rise in REITs.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.