The novel coronavirus pandemic has forced every investor to hunt for the best real estate investment trust or REIT stocks that will help their portfolios grow. The reason why REITs remain such a favorite for investment managers is the high degree of capital appreciation they offer and the 90% rule — REITs are bound to distribute 90% of their taxable earnings to existing shareholders in the U.S.
You can invest in these vehicles directly or choose a hedge fund that specializes in this area. That brings us to LaSalle Investment Management — a leading real estate investment management firm focused on investing in REITs.
LaSalle is an independent subsidiary of Jones Lang LaSalle (NYSE:JLL), an American commercial real estate services company. It publishes a form 13F with the Securities and Exchange Commission after the end of every quarter that offers a snapshot of its investments.
In the recently concluded quarter, the investment management firm exited from five positions and entered the same number of new positions. Healthcare and residential REITs were the most significant casualties. Meanwhile, the biggest new entrant to the firm’s portfolio by dollar value is one of the largest multifamily companies in the U.S.
Overall, the portfolio is worth approximately $2.6 billion, with 46 total positions. LaSalle’s top three holdings are Equinix Inc (NASDAQ:EQIX), Public Storage (NYSE:PSA) and Avalonbay Communities (NYSE:AVB).
But below are the five best REITs I’d truly like to focus on today — the company’s new positions:
- Camden Property Trust (NYSE:CPT)
- Cousin Properties (NYSE:CUZ)
- Site Centers (NYSE:SITC)
- VEREIT (NYSE:VER)
- Weingarten Realty Investors (NYSE:WRI)
REITs: Camden Property Trust (CPT)
Position in the Portfolio: 1.5%
“One of the largest publicly traded multifamily companies in the United States,” Camden Property Trust, is a very safe investment if you are looking for something in the apartment REIT space. CPT stock trades at a price-to-fund from operations (FFO) ratio of 18 times, with a four-year average yield of 4.84%.
The apartment landlord boasts an excellent A-rated balance sheet, with no debt maturities until 2022. Data shows that millennials are more likely to rent rather than buy a house due to financial pressures and high real estate prices, acting as a strong tailwind for the company.
Operating cash flows have been excellent as well, coming to $110.58 million in the recently completed quarter. The company’s debt to equity ratio has oscillated over the last few quarters but remains approximately 0.70 times. That is par for the course for REITs, so the company is not in danger of facing a liquidity crisis anytime soon.
As with all companies, Camden is also facing headwinds due to the novel coronavirus pandemic. The apartment REIT is not increasing rents on lease renewals, waiving late fees and stopping evictions for residents that have suffered economic hardship due to the virus. In addition, rent control is becoming a hot button issue in Washington D.C., especially among members of the House Democratic Caucus. In September 2019, Democratic Congresswoman Alexandria Ocasio-Cortez unveiled a bill that would, among other things, place a national cap on annual rent increases.
Cousins Properties (CUZ)
Position in the Portfolio: 0.11%
Office REITs have taken a beating in recent months, as a substantial number of companies adopted work-from-home policies for the safety of their staff. Although companies are reopening with strict social distancing rules, there are still several firms that are urging staff to work remotely until the situation is clearer.
In the current climate, I am not surprised that office REIT Cousin Properties lost a bit of steam in the past six months. But I expect the stock to bounce back very soon and erase its losses. That’s because the company benefits from a modestly leveraged balance sheet and well-positioned class-A properties in areas like Atlanta and Austin, Texas.
The company has an ample amount of cash flows to cover its dividends, so I don’t believe a cut is around the corner there. Interest coverage is 3.14 times, while net debt to EBITDA stands at 5.5 times — quite reasonable by industry standards.
On a trailing-12-months basis, the stock is trading at a P/FFO ratio of 10.94 times, which compares favorably to the sector median of 13.34 times. Meanwhile, the dividend yield over the last four years stands at 8.89%, while for the sector as a whole, it was 5.09%. Goes without saying that CUZ is perhaps one of the best REIT stocks out there.
Site Centers (SITC)
Position in the Portfolio: 0.07%
Another new position for LaSalle this quarter is Site Centers, a shopping center focused REIT, which recently suspended its quarterly distribution due to Covid-19. In April, the company collected 50% of rent from tenants — not a bad number considering shopping centers are perhaps the hardest hit sector during this crisis.
From a liquidity perspective, Site Centers is in an excellent position, with cash in hand of $514 million. From a valuation perspective, SITC stock trades at a P/FFO ratio of just 5.83 times, a discount of 52.8% as of this writing.
I believe shares of the shopping center REIT are weighed down by the general pessimism surrounding the industry.
By the company’s own account, there isn’t any fear that a major tenant could go bankrupt due to Covid-19. However, we don’t have a definitive timeline for Covid-19, and we may end up with a scenario where there is a slower-than-expected recovery, which could force companies to look for alternative methods to shore up its balance sheet. I am a bit bearish on the retail sector in general, but I don’t think there is anything in the financials here that should cause sleepless nights for investors. I always find a retail company tough to describe as one of the best REIT stocks but SITC is a safe investment.
VEREIT (VER)
Position in the Portfolio: 0.55%
VEREIT is a diversified REIT possessing a portfolio of various property types, including retail, restaurant, office and industrial real estate assets. It was formed after an accounting scandal rocked American Realty Capital in 2014. Since that time, management has worked diligently to create a high-quality portfolio of net lease properties that generates $1.1 billion in annualized rent.
Net debt to EBITDA is steadily coming down with every quarter, and the cash flow position is positive. Cash and cash equivalents stood at $1.23 billion at the end of the recent quarter. Considering its strong liquidity position, the decision to slash the second-quarter dividend by 44% came as a surprise to many.
Management said it did not want to increase its debt obligations to keep paying its dividend in future quarters. Hence it opted to decrease distributions at this stage. Its more of a preemptive move, in my opinion, since I don’t believe the company is in any danger of running out of cash.
Still, the dividend cut should save the company a decent amount of cash that it can use to keep operations running smoothly during the pandemic. Just like the properties in its portfolio, the tenant base of the company is also varied with several investment-grade companies in there. There’s no danger of a tenant defaulting anytime soon, which is excellent.
Weingarten Realty Investors (WRI)
Position in the Portfolio: 0.54%
Wrapping up the list of new investments is Weingarten Realty Investors, a REIT that specializes in shopping centers, based in the Southern United States, mainly anchored by grocery stores. It has a BBB-rated balance sheet with no significant maturities scheduled for 2020. The company has also drawn down the remaining amount of its $500 million credit facility, giving it more than enough liquidity to survive the pandemic.
However, if the effects of the virus persist, it could lead to liquidity deteriorating substantially, putting pressure on the company to tap the bond markets for funds. In addition, unlike several other REITs in the industry, WRI hasn’t cut its dividend. As it stands, the payout ratio is 74.50%, fairly high, even for a REIT. If things remain the same, I wouldn’t rule out a dividend cut.
The company trades at a P/FFO ratio of 10 times versus a sector average of 12.96 times. Considering its portfolio, liquidity profile, a dividend yield of 6.76%, and discounted share prices I would rate the shares a buy, but I would stop short of saying it’s one of the best REIT stocks.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.
