Market volatility is increasing once again. And the broader markets may finally be giving back some of the impressive gains that have racked up since late March. As we enter the second half of the year, it may be a good time to look at high-yield real estate investment trusts (REITs) in order to diversify your portfolio.
In a low interest rate environment, many investors consider investing in stable dividend stocks. And REITs typically fly under the radar, even as they allow market participants to earn many years of passive income and provide some capital appreciation. For example, since the market lows of March, the Vanguard Real Estate ETF (NYSEARCA:VNQ) is up over 30%, with a dividend yield currently standing at 4.87%. Investments that pay and grow can be a reliable path to creating long-term wealth.
REITs can be regarded as total return investments. Put another way, they typically provide stable dividends as well as the potential for long-term capital appreciation. By law, REITs are required to distribute at least 90% of their taxable income annually to shareholders. That’s the primary reason their dividends are so robust.
The broad range of REITs available on the market makes them liquid investments. They are also diversified across a range of properties in different geographies both in the U.S. and globally.
Despite the recent share price increases in the sector, I believe there are still good options for long-term investors. What type of REITs should they look for? For starters, I’d research those with strong business models, portfolios and balance sheets. That way, in case the share price goes lower in coming weeks, you’ll still be comfortable holding them for the long run.
You also want to pay attention to funds from operations (FFO). REITs use this figure to define cash flow from operations. In general, REITs calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (NAREIT).
With that in mind, here are three of the best REITs to buy now:
All three of these REITs present a strong opportunity for long-term investment.
REITs to Buy Today: Digital Realty Trust (DLR)
Dividend Yield: 3.37%
Current Price: $132.81
52-Week Range: $105-$158.36
Digital Realty is a data center REIT. It owns, acquires, develops and operates data centers. Data center REITs currently comprise a small percentage of all broad-based Equity REIT ETFs. Put another way, it is a niche section within the sector.
The San Francisco-based group boasts customers spanning cloud and information technology services to communications and social networking, as well as financial services, manufacturing, energy, healthcare and consumer products. DLR has 275 data centers in 44 metropolitan areas globally, with a total occupancy rate of 86%.
Although U.S. customers make up more then 75% of the market, growth in Europe has been particularly notable, in part due to several strategic acquisitions.
Earlier in May, the group released robust Q1 results. Quarterly revenue was just shy of $588 million and adjusted EPS was $1.44.
Profits came in at $202.86 million, or 90 cents per share. This compares with $95.87 million, or 46 cents per share in last year’s first quarter.
Management reported another metric, core FFO, in its quarterly results. The company explained the measure:
“[Core FFO serves] as a supplemental operating measure because, in excluding certain items that do not reflect core revenue or expense streams, it provides a performance measure that, when compared year over year, captures trends in our core business operating performance.”
In Q1, core FFO was $1.53. The group expects that number to dip in Q2 and Q3, but to recover in Q4.
The company set full year EPS guidance between $5.95 and $6.25 and full year revenue guidance from $3.725 to $3.825 billion.
Needless to say, the digital economy has transformed how we live and how companies create customer value. In the era of Covid-19, many firms are likely to increase their investments in cloud computing and related technologies. And an growing number of companies are opting for third-party IT infrastructure. With increased emphasis on stay-home and work-from-home, it is easy to see how a digital REIT may do well during this decade.
Furthermore, analysts are expecting the growth of autonomous vehicle (AV), artificial intelligence (AI) and virtual reality (VR) markets to fuel demand for data centers.
If you also believe that virtual offices and virtual offices and technology will increasingly become part of our professional and personal lives, then you may want to research DLR as one of the best REITs to buy now. Year-to-date (YTD), DLR is up about 12%. Following the most recent ex-dividend date of June 12, the shares are next expected to go ex-dividend in September.
Finally, you may also want to keep an eye on the Pacer Benchmark Data & Infrastructure Real Estate ETF (NYSEARCA:SRVR) to follow the developments in data center REITs.
Best REITs to Buy: Simon Property Group (SPG)
Dividend Yield: 11.68%
Current Price: $71.92
52-Week Range: $42.25-$168.52
Simon Property Group owns premier shopping, dining, entertainment and mixed-use properties in North America, Europe and Asia. Current occupancy rate stands at 94% and the base minimum rent per square foot is $55.76.
With a market cap of $22 billion, SPG is the biggest U.S. mall owner and one of the best known retail REITs. It owns around 200 malls and outlet centers in the U.S., including Northgate Mall in Seattle and Copley Place in Boston.
On May 11, the Indianapolis-based group released Q1 results. Net income attributable to common stockholders was $437.6 million, or $1.43 per diluted share, as compared to $548.5 million, or $1.78 per diluted share in 2019. Thus quarterly profits fell over 20% during the first quarter ended March 31.
FFO was $980.6 million, or $2.78 per diluted share, as compared to $1.082 billion, or $3.04 per diluted share, in the prior year period.
In order to preserve cash and the health of the balance sheet during the Covid-19 uncertainty, management has suspended more than $1.0 billion of capital for new and redevelopment projects. At the end of the quarter, the REIT had approximately $8.7 billion of liquidity.
As May began, management first opened malls in South Carolina. As of May 11, the company had reopened 77 of its U.S. retail properties in markets. And 12 of Simon’s Designer and international Premium Outlets properties have reopened.
Year to date, shares are down about 40%. They are expected to go ex-dividend next on June 18. If you also agree that this year’s unexpected events have created a long-term buying opportunity in SPG stock, then you may want to do further diligence on the group as one of the best REITs to buy now.
Best REITs to Buy: Stag Industrial (STAG)
Dividend Yield: 5.42%
Current Price: $26.57
52-Week Range: $17.54-$33.48
Stag Industrial focuses on the acquisition and operation of single-tenant industrial properties throughout the U.S. Put another way, it is a pure-play industrial REIT that is active across the entire domestic industrial real estate market, which is estimated to be more than $1 trillion in total size.
It currently holds close to 500 assets in almost 50 industries. Management emphasizes that the focus on single-tenant industrial real estate results in larger and thus more sophisticated tenants. The occupancy rate on the total portfolio is 96.2%.
In late April, the group announced Q1 results. It reported 42 cents of net income per basic and diluted common share, as compared to 5 cents in the first quarter of 2019.
The REIT generated core FFO of $70.6 million, compared to $53.2 million for the first quarter of 2019, an increase of 32.8%. And it achieved 47 cents of core FFO per diluted share, an increase of 4.4% YoY.
Given the uncertainty regarding the economic impact of the pandemic, investors were relieved to see that, to date, STAG has collected 99% of March base rental billings and 90% of April base rental billings.
So far in 2020, shares are down over 15%. The next ex-dividend date is expected in late August. If you are looking at the potential of the long-term expansion of industrial, logistics and warehousing real estate, then you may want to consider STAG as one of the best REITs to buy.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.