With the major financial indices continuing to break new records, there are few reasons to doubt this bull market. But the rise of equities against some powerful headwinds raises serious questions. Amid the uncertainty, it may be time for investors to consider real estate investment trusts, or REITs, for their recovery plays.
Publicly traded REITs swap hands on major exchanges — just like blue-chip stocks. As a result, they offer flexibility and convenience to their prospective buyers. But what makes them distinct from other investments is that by law, REITs must distribute 90% of their taxable income to shareholders at minimum. Therefore, this subsegment generally offers higher-yielding dividends.
Moreover, REITs cover a vast range of investment sectors. If you want to participate in the bull market but also take the sting away from potential volatility, these investments may work out well. Essentially, you get the best of both worlds — the potential for capital gains if the economy continues its recovery trend, and passive income streams while you’re waiting.
The latter is particularly important because high-priced sectors tend to get overstretched. If the robustness of the main indices fades, you can still depend on the dividends of popular trusted REITs. And if circumstances go awry in the markets, dividend-paying securities tend to be less volatile.
If you believe in the economic recovery narrative, these REITs can provide balanced exposure to your portfolio:
- Realty Income (NYSE:O)
- Kimco Realty (NYSE:KIM)
- AvalonBay Communities (NYSE:AVB)
- Camden Property Trust (NYSE:CPT)
- American Campus Communities (NYSE:ACC)
- Digital Realty Trust (NYSE:DLR)
- Innovative Industrial Properties (NYSE:IIPR)
For full disclosure before we move forward, I have some doubts about the market’s ability to keep rising. Since the Federal Reserve has fueled this optimism through artificial rate suppression, it may not take much to ruin everyone’s appetite. Still, if you’re confident in our upward mobility, these REITs can provide profits — and allow you to sleep at night.
REITs: Realty Income (O)
One of the most popular REITs to buy, Realty Income has a long track record extending over five decades. According to its website, Realty Income “has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term, net lease agreements.”
Presently, the company has more than 6,700 properties under such agreements across the entire U.S., Puerto Rico and the U.K. Further, Realty Income has approximately 630 unique clients from 58 industries. Some of its top clients are 7-Eleven, Dollar General (NYSE:DG) and FedEx (NYSE:FDX).
Other business categories that fall under Realty Income’s purview are big-box retailers, cineplexes, fitness centers, convenience centers and grocery stores. If in-person shopping moves toward prior levels as the economy recovers, you’d expect retail channels to even out.
The decline in e-commerce sales relative to pandemic highs suggests that so long as nothing crazy happens, physical retail can make a comeback. And before I forget, Realty Income offers a monthly dividend — something to keep in mind if you’re looking for passive income opportunities.
Kimco Realty (KIM)
Before I discuss Kimco Realty, I must state for the record that I haven’t been a big fan of REITs that cater to shopping centers — and I’d say for good reason. When the novel coronavirus disrupted the sector, government agencies the world over imposed lockdowns or restrictions on non-essential activities.
While many of us might disagree, non-essential activities included critical businesses like barbers and hair salons. Therefore, the phenomenon of Covid beards and awful haircuts quickly became the norm. With so many businesses knocked out through no fault of their own, KIM stock suffered a sharp decline early in the crisis.
Of course, it would be unfair to leave Kimco there. Year-to-date (YTD), KIM is up 42%, dramatically changing its narrative. Unlike some other pandemic-disrupted investments, Kimco shares are above their pre-pandemic valuation.
What has been the company’s saving grace is that many of its clients are essential businesses. Therefore, KIM shares may have something for both optimists and pessimists. Kimco also has a trailing-12-month yield of 2.77%.
REITs: AvalonBay Communities (AVB)
It’s confession time: I’m worried about apartment rental REITs. On one hand, the surge in rental prices seems like an excellent backdrop for investments like AvalonBay Communities. The organization “has a long-term track record of developing, redeveloping, acquiring and managing distinctive apartment homes in some of the best U.S. markets,” per its website.
On the other hand, the obvious question has to do with sustainability. While many Americans saved money on their commutes (if they worked from home) and enjoyed government stimulus checks, just how much of a financial benefit are we talking about? Even if the windfall was in the thousands of dollars, this is a non-recurring circumstance.
At the same time, much of the increase is coming from major metropolitan areas — regions where many residents can more or less afford the bump up in prices. Therefore, some experts believe rentals can continue rising, which is an alarming concept to behold.
Nevertheless, if you believe the rental market will continue growing, you may want to check out AvalonBay Communities. The company controls several highly desirable properties.
Camden Property Trust (CPT)
If you’re convinced a post-pandemic economy can continue producing strong job growth, then you may want to check out Camden Property Trust. Also specializing in multi-family units and luxury apartments, Camden’s key advantage over other apartment REITs is location, location, location.
From its website, the company has several communities in highly desirable areas. For example, it has 12 properties in Phoenix and 10 communities in Austin. As you might know, both these cities are popular with millennials. Considering that millennials represent the largest demographic in the U.S. workforce, Camden Property is focusing on the most viable markets.
And as cynical as it sounds, some evidence indicates that people have no choice but to pay rising apartment rental rates. The ridiculous surge in housing prices forced would-be homebuyers out of the market. Frustrated but with little recourse, they’ve become renters, hoping to wait out the real estate bull market.
But since housing inventory in high-demand areas is extremely limited, no one knows for sure if the housing bubble will pop. Thus, CPT stock could have a long upside pathway.
REITs: American Campus Communities (ACC)
American Campus Communities was on a decent trajectory since early 2018. Among other factors, a robust labor market incentivized people to get a college education, which in turn boosted the student housing-focused REIT.
But then, the coronavirus changed everything. Suddenly, being around other people presented major health concerns. And even though undergraduate students are often very young, the same can’t be said for tenured professors, faculty and administrative members. Therefore, when academic institutions shut down, it caused a dramatic decline in ACC stock.
Still, the economic recovery has been a boon for the stock. Shares are up 43% over the trailing year. On a YTD basis, they’re up 13%, reflecting enthusiasm for a return to the in-person college experience.
But will things ever go back to the way they were? One of the challenges that critics see is that virtual learning platforms can start to chip away at four-year institutions. Also, the pandemic may have forced students to reconsider if college is really the way to go. However, if you think Covid-related changes are only temporary, ACC may be the ticket for both income and growth.
Digital Realty Trust (DLR)
A REIT that optimists and skeptics can both reasonably bank on, Digital Realty Trust invests in carrier-neutral data centers. They serve customers across several industries, including information technology (IT), communications, finance and manufacturing.
No matter how the pandemic plays out, data centers will play an integral role in the economy, potentially affording DLR stock permanent relevance.
Even if circumstances don’t pan out favorably, Digital Realty Trust has a confidence-inspiring track record. For one thing, the company has a forward annualized dividend yield of nearly 3%, which is quite generous. More impressively, DLR has racked up 12 years of consecutive dividend increases. Since it’s well on its way to being a dividend aristocrat, you can expect management to hold the fort.
Additionally, DLR has consistently risen since its public market debut in October of 2004. Interestingly, Digital Realty is one of the very few stocks that saw shares rise in value during the first quarter of 2020 — the only comparison I can think of is Teladoc Health (NYSE:TDOC).
That speaks to how important the data center industry is, which should inspire confidence in DLR stock.
REITs: Innovative Industrial Properties (IIPR)
I can see Innovative Industrial Properties moving higher irrespective of what happens with the underlying economy. One of the few cannabis plays that has been a consistently strong performer, IIPR stock is enjoying the present bull market.
The company is a REIT which exclusively focuses on the medicinal aspects of botany. Therefore, you won’t have to worry about the company venturing into the seedier side of the industry.
Not that it matters, as Americans have grown increasingly tolerant of cannabis. From a Pew Research Center report, people in the U.S. “overwhelmingly say marijuana should be legal for recreational or medical use.” Should Innovative Industrial ever take a highly unlikely step into the recreational side of things, it probably wouldn’t get any pushback.
But for now, the medicinal angle should prove viable if the bull market continues. Medical marijuana has several applications for relief of physical symptoms, and it may be a viable treatment for anxiety and depression. IIPR is fortuitously poised for success.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.