For the better part of 2020, real estate stocks have lagged behind the stock market. The industry faltered during the pandemic as lockdown restrictions and social distancing measures forced people to retreat to their homes. However, since the approval of the Covid-19 vaccine, real estate stocks are back in the game. The iShares Global REIT (NYSE:REET) grew 17% in the past two months compared to 15% growth in the Dow Jones.
The pandemic has led to a sharp increase in office vacancies, while the travel bans and lockdowns crippled retail and hotel owners. Moreover, apartment owners in major cities such as New York were compelled to offer massive discounts to potential tenants.
The Covid-19 vaccine has flipped the script, and real estate stocks will continue their rally in 2021. Commenting on the vaccine, Tai Hui of J.P. Morgan Asset Management says, “This offers a ray of hope that the market did not hesitate to take advantage of.”
Hence, let’s look at seven of the hottest real estate stocks to watch out for in 2021:
- Simon Property Group (NYSE:SPG)
- Alexandria Real Estate Equities (NYSE:ARE)
- AvalonBay Communities (NYSE:AVB)
- D.R. Horton (NYSE:DHI)
- Public Storage (NYSE:PSA)
- Invitation Homes (NYSE:INVH)
- Lowe’s Companies (NYSE:LOW)
Real Estate Stocks to Buy: Simon Property Group (SPG)
Simon Property Group is one of the largest commercial real estate investment trusts (REITs) and shopping-mall operators in the U.S. As of December 2019, it had interests in over 204 properties, including more than 100 malls and 69 premium outlets. Despite the weaknesses in the sector, SPG stock has done relatively well in the stock market, growing by 23% in the past six months.
Financial results have been understandably tough for the company. Revenues were stagnant for the past couple of quarters. Cash collections from billed rents in the third quarter improved by at least 13%. All of its properties are now open, and the company is benefiting from the improvements in customer traffic, rent collection and retailer sales.
Additionally, SPG stock has one of the more impressive dividend yields in the sector at 6.25%. Therefore, it has built up a good head of steam heading into 2021.
Alexandria Real Estate Equities (ARE)
Alexandria Real Estate Equities is an urban office REIT that owns a portfolio of strategically positioned healthcare properties. Its business model is based around the development of innovation centers across significant institutes in the U.S. ARE stock has had a strong track record of shareholder returns and has held up well despite the pandemic.
The pandemic has done little to impact the company’s revenue growth. Revenues have grown by double digits in the past three quarters, with almost a 40% increase in its third quarter. Funds from operations per share also improved to $1.83 in its latest quarter from $1.75 in the prior-year period. Its rent collection rate is at a solid 99.7%.
Moreover, it has a healthy dividend yield of 2.5%. Hence, with a strong showing this year, ARE stock has a lot of momentum heading into 2021.
AvalonBay Communities (AVB)
AvalonBay Communities is one of the largest apartment REITs globally, with ownership interests in more than 250 apartment communities. Its properties are located in suburban locations primarily in the Northeast and Midwest. It is one of the more financially robust REITs out there with an A-rated balance sheet and a massive free-cash-flow balance. AVB stock is down just 2% in the past three months, despite the effects of the pandemic.
Covid-19 has weighed in on the company’s earnings, but it has done exceedingly well in weathering the storm. Third-quarter results missed analyst estimates and came in lower than the third quarter of 2019. Revenues have averaged at $581 million, and with several development projects in business-friendly areas such as Miami and Denver, I expect that figure to grow in 2021.
Moreover, its dividend yield of 4.1% is solid with a payout ratio of nearly 70%.
D.R. Horton (DHI)
D.R. Horton is a homebuilding company that acquires and develops lands to construct and sell homes. It operates in 29 U.S. states and 88 markets. Contrary to the market, the company rode the wave of homeownership during the pandemic. This is why DHI stock has grown 27% in the past six months.
The company has had a sparkling earnings record in the past couple of years and seems unfazed by the pandemic. Its fourth-quarter results comfortably beat analyst estimates and revenues were 27% higher than the same period last year. Its diluted earnings per share also improved to $2.24 from $1.35 in the previous quarter.
Moreover, its stellar balance sheet provides sufficient flexibility to enhance shareholder value. With 38,000 homes in its inventory and strong sales trends, it is likely to have another solid year in fiscal 2021.
Public Storage (PSA)
Public Storage is an REIT that owns and operates self-storage facilities. It is the largest company in its niche and has interests in nearly 2,500 self-storage facilities across 38 states. Self-storage is typically considered to be a stable business, which is why PSA stock grew by a healthy 8% in the last six months.
Earnings results for the company has been relatively stable. Revenues in its latest quarter grew by 0.2% to $730.66 million. However, its net income dropped to $1.41 per share from $1.93 per share. Additionally, it has a pristine balance sheet with recession-resistant assets.
Dividends are also secure with a payout ratio of 74.4% and an impressive dividend yield of 3.68%. Therefore, with such a stable year under the circumstances, expect Public Storage to have a much stronger 2021.
Invitation Homes (INVH)
Invitation Homes is a leading single-family-home rental REIT. It is the gold standard in its niche with healthy margins and the most desirable locations. It boasts an impressive portfolio of approximately 80,000 homes. INVH stock has held up during the pandemic and has grown roughly 2.85% in the past six months.
Third-quarter results for the company were impressive, sustaining strong funds from operations through the pandemic. Revenues grew by roughly 3.6%, beating analyst estimates by $370,000. Rental growth is accelerating as it collected 97% of its rents in the third quarter. Rent collection is just 2% shy of pre-Covid-19 levels. Earnings results have remained impressive throughout the year.
With manageable leverage and a strong cash position, INVH stock is in an excellent position to expand in 2021, making it a clear pick for this list of real estate stocks.
Lowe’s Companies (LOW)
Lowe’s is one of the major home-improvement retailers operating in Mexico, Canada and the U.S. It offers a wide variety of products for maintenance, remodeling, construction and others. The home improvement industry has been growing steadily in the past several years, and the pandemic has kicked it into overdrive. With lower interest rates, rising home values and lockdown restrictions, people have had all the more reason to improve their homes’ quality. This is perhaps why LOW stock is up more than 20% in the past six months.
Financial results were stable throughout the year. In its most recent quarter, revenues grew by 28.3%, comfortably surpassing analyst estimates. Earnings per share of $1.98 also beat analyst estimates by 2 cents. Moreover, comparable sales growth was at 15% to 20%. Its liquidity position is also robust, with $8.2 billion of cash and $3.0 billion in undrawn capacity on credit. In the future, it is in a great position to pick up where it left off in 2020.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.