At first glance, real estate investment trusts (REITs) and the broader real estate sector are languishing this year. The MSCI US Investable Market Real Estate 25/50 Index is lower by almost 12% year-to-date, but the good news for investors is that there are still plenty of potentially rewarding REITs to buy.
First, let’s examine the rough part of the real estate sector thesis in 2020. Historically, REITs perform well when interest rates are low, which is certainly the case this year. The asset class is generally considered high-yield – the MSCI US Investable Market Real Estate 25/50 Index yields 3.92%. Hence it’s inverse correlation to rates.
However, the novel coronavirus pandemic is making 2020 anything but typical. A bevy of REITs, including mall owners and other retail landlords, are being punished by retail store closures.
Hotel REITs are being crimped by the lack of travel. Apartment landlords could experience significant pain if rent collection doesn’t improve and evictions spike. Add to those ominous trends, the work from home theme could be a major, long-ranging issue for office REITs.
None of that is good news. Those scenarios underscore why investors need to be picky when it comes to evaluating REITs to buy.
Here are a few ideas to consider.
- VICI Properties (NYSE:VICI)
- Prologis (NYSE:PLD)
- Equinix (NASDAQ:EQIX)
- MGM Growth Properties (NYSE:MGP)
- CyrusOne (NASDAQ:CONE)
VICI Properties (VICI)
It’s easy to assume that the owner of Caesars Palace on the Las Vegas Strip is Caesars Entertainment (NASDAQ:CZR). In reality, the actual owner is Vici Properties, a gaming REIT spun off several years ago when the old Caesars was facing bankruptcy.
In fact, the deal that created the new Caesars is a boon for this real estate company, making it one of the REITs to buy. Vici already acquired several properties from the old Eldorado Resorts as part of that company’s cash-raising efforts to bring the Caesars deal across the finish line. The REIT is also a logical buyer for one, maybe two Las Vegas assets new Caesars could sell over the next 12 to 18 months.
All of that sounds good, and it is, but it doesn’t end the Vici bull case. There are some other favorable points in the REIT’s favor.
First, while Caesars is its major client, Vici has one of the most diverse tenant bases among gaming REITs. Second, a small percentage of its rental income is derived from the still fragile Las Vegas market. Third, a dividend hike in September is a legitimate possibility. Finally, the stock closed around $23 on Aug. 17, but at least one analyst sees a $30 name here.
Prologis is one of the REITs to buy that actually highlights a problem with old guard real estate index funds: those products are too diverse for their own good. Sure, those funds feature some exposure to industrial REITs – one of the healthier corners of the real estate sector – but that exposure is cannabilized by allocations to retail REITs.
That is to say industrial REITs, like Prologis, are benefiting from the ongoing move to e-commerce, while brick-and-mortar retail REITs are wilting against that backdrop. That trend is sticky and even when Covid-19 is defeated, online retail will continue growing.
Simply put, Amazon (NASDAQ:AMZN) and the like need a lot of real estate for the logistics side of their businesses. For those that can’t access Amazon’s north of $3,000 price tag, Prologis is a more approachable way of participating in the online retail boom. Plus, it offers a dividend yield of 2.26%, which for better or worse, is decent these days.
Speaking of high-priced securities, there’s Equinix, which closed around $772 on Aug. 17. Equinix is a technology REIT, which like industrial REITs, are often overshadowed in broader real estate benchmarks. That’s a shame because EQIX stock is higher by 41% over the past year.
In tech parlance, Equinix is a data center REIT. That puts it at the epicenter of some mega trends such as increasing demand for cloud computing and cybersecurity services. No one should need convincing that data centers are credible catalysts for equity upside. Nvidia (NASDAQ:NVDA) is a prime example of a name that proves as much, but data center operators typically aren’t landlords. That responsibility falls to the likes of Equinix.
The REIT is also benefiting from the “new normal” via themes such as increased gaming and work from home.
In the second quarter, “Equinix saw strength across customer industries as enterprises adjust to employees working from home (including video conferencing), networks accommodate the resulting traffic growth, and media companies meet demand for more gaming and video online,” according to Morningstar.
MGM Growth Properties (MGP)
Like the aforementioned Vici, MGM Growth Properties is a gaming REIT, but these companies don’t have a whole lot in common. With MGP, there’s twofold risk. Heavy exposure in Las Vegas and dependence on a single tenant: MGM Resorts International (NYSE:MGM).
The Las Vegas recovery is still fluid and probably a year or two away from reaching pre-pandemic levels. Fortunately for MGP investors, MGM is one of the most financially sound gaming companies. Over the course of casino industry shutdown and into the gentle reopening process, MGP collected 100% of rent from MGM.
MGP yields 6.84%, which is high, but the company has the resources to sustain and grow that payout, something it’s done with regularity over the past several years. Additionally, MGM is reducing its stake in the REIT, which amounts to a share buyback of sorts for MGP while enhancing the REIT’s independence.
The final stock on this list of REITs to buy is CyrusOne. With a market capitalization of just under $10 billion, CyrusOne is a mid-cap version of Equinix. The company has 50 data centers and 1,000 clients, including 200 Fortune 1000 firms, one of which is Nvidia. At the epicenter of artificial intelligence (AI) and data center real estate, CyrusOne benefits from many of the same tailwinds as its larger rival Equinix.
“We expect (CyrusOne) will continue to benefit from the surge in data traffic caused by the Covid-19 outbreak and expect demand from hyperscale customers will remain elevated,” according to CFRA Research analyst Keith Snyder.
Whether it eventually becomes as large as Equinix remains to be seen, but CyrusOne is looking to scale and is planning to spend accordingly to meet rising demand for data centers. In keeping its 2020 revenue and funds from operations (FFO) guidance in tact, CyrusOne raised its spending guidance to $850 million to $950 million from $750 million to $850 million. That’s a sign of robust demand and a confident management team.
CONE stock resides around $84, but given the gravity of the data center demand scenario, the name easily offers medium-term double-digit return potential.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.