The real estate sector has gained roughly 31% year-to-date (YTD), beating the 25%-plus return for the S&P 500 index by a wide margin. Investors are now debating whether real estate investment trusts (REITs) can continue outperforming other investments for the remainder of 2021.
While the 10-year Treasury note hovers around 1.5 and the S&P 500 currently yields shy of 1.3%, most REITs yield around twice as much these days. As a result, real estate stocks are among the top picks for income investors.
REITs provide consistent income via generous dividend yields that steadily increase returns. So, investing in a diverse portfolio of REITs that purchase property, collect rent and pay at least 90% of their taxable income back to shareholders is a solid defensive strategy.
Further, REITs can be used as an inflation hedge. In general, real estate stocks offer a hedge against inflation via their ability to raise rents. According to research, “REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last twenty years.”
There are different types of REITs as well. For example, equity REITs collect rent or profit from the sale of properties. These trusts typically invest in residential buildings, offices, industrial properties (like warehouses and storage centers), shopping malls, healthcare facilities (hospitals and nursing homes) or specialized properties (data centers, farms and more). On top of this, there are also mortgage REITs. Known as mREITs, they invest in mortgages or mortgage securities. Finally, if an mREIT also invests in property assets, it is referred to as a hybrid REIT.
Having a diverse mix of these REITs in your portfolio is appealing for a couple of reasons, but mostly because it can potentially decrease portfolio volatility. So, with that information, here are seven REITs that may offer lucrative yields and significant growth prospects in the coming months:
- Crown Castle International (NYSE:CCI)
- CyrusOne (NASDAQ:CONE)
- Duke Realty (NYSE:DRE)
- Equinix (NASDAQ:EQIX)
- iShares U.S. Real Estate ETF (NYSEARCA:IYR)
- Life Storage (NYSE:LSI)
- Vanguard Real Estate ETF (NYSEARCA:VNQ)
REITs to Buy: Crown Castle International (CCI)
52-week range: $146.15 – $204.62
Dividend yield: 3.26%
First up on this list, Houston, Texas-based Crown Castle leases roughly 40,000 cell towers stateside. This pick of the REITs also owns more than 80,000 miles of fiber. Its tenants are wireless service providers that install equipment on these towers.
Crown Castle released third-quarter results on Oct. 20. Site rental revenue grew 8% year-over-year (YOY) to $1.45 billion. Income from continuing operations came in at $351 million as well, or 81 cents per diluted share. That was up from $163 million or 38 cents per diluted share in the prior-year quarter. Finally, cash and equivalents ended the period at $542 million. On the results, CEO Jay Brown cited:
“We delivered strong results in the third quarter and increased our annualized common stock dividend by approximately 11% to $5.88 per share […] The dividend increase is supported by the expected combined growth in 2021 and 2022, and represents the second-consecutive year of dividend growth that meaningfully exceeds our long-term growth target of 7% to 8% per year.”
Management has developed significant know-how in infrastructure projects accelerating network connections. What’s more, the growth in mobile phone data usage and 5G networks has been providing tailwinds for consistent top-line growth.
Right now, CCI stock hovers around $180, up more than 12% YTD. The current price supports a dividend yield of about 3.2%. Shares are trading at 68 times forward earnings and 12.6 times trailing sales, according to Seeking Alpha. Investors could regard a potential decline toward the $175 level or below as a buying opportunity.
52-week range: $61.64 – $83.94
Dividend yield: 2.53%
The next entry on this list of REITs is also based in Texas. CyrusOne is a high-growth name with over 50 data centers worldwide. It is primarily a wholesale provider, offering large spaces on longer-term leases.
This REIT issued Q3 results on Oct. 27. For the period, revenue increased 16% YOY to $304 million. Net income also came in at $6.7 million or 5 cents per diluted share, compared to a net loss of $37.3 million or 32 cents loss per diluted share in the prior-year period. Further, funds from operations (FFO) surged 11% YOY to $127.2 million for Q3. The company currently has $3.56 billion of long-term debt against total available liquidity of $2.15 billion. Cash and equivalents ended the period at $456 million. On the results, CEO David Ferdman remarked:
“We had strong financial results and another good bookings quarter, including a significant contribution from our European markets and healthy pricing across the leases.”
CONE stock is an attractive pick of the REITs for long-term investors with its 2.53% dividend yield and stable cash flows. The stock hit an all-time high (ATH) in recent days. It currently hovers in the low $80s territory, up nearly 12% since the start of the year. Shares are trading at 8.6 times trailing sales and 3.7 times book value.
REITs to Buy: Duke Realty (DRE)
52-week range: $37.54 – $57
Dividend yield: 2.00%
Based in Indiana, Duke Realty focuses on logistics markets stateside. Mainly, the company owns industrial properties like warehouses, focusing on the supply chain.
Like others on this list, Duke announced its Q3 results on Oct. 27. For the period, revenue increased 7% YOY to $280 million. Further, net income was $495 million, or $1.30 per diluted share. That was up from $72 million, or 19 cents per diluted share in the prior-year quarter. Adjusted for non-recurring items, Duke Realty generated quarterly FFO of 46 cents per share, up from 40 cents a year ago. Lastly, cash and equivalents ended the period at $10 million. Following the results, CEO Jim Connor noted the following:
“I am pleased to announce our third quarter operating results, which were highlighted by record cash rent growth and substantially elevated leasing volumes across our portfolio.”
Duke Realty is a leading player in the distribution space. During the pandemic, the increase in e-commerce has meant a growing need for industrial warehouses and distribution centers. Analysts expect this trend to continue, leading to robust top-line growth for this name.
DRE stock recently hit a record high as well. It currently hovers at the $56 mark, up 40% YTD. Shares are trading at 79 times forward earnings and 19 times trailing sales. Interested readers could regard a potential decline toward the $50 level as an opportune entry point for this pick of the REITs.
52-week range: $586.73 – $885.26
Dividend yield: 1.47%
Next up on this list of REITs is Equinix, a data center REIT focusing on digital infrastructure and global interconnection services worldwide. It owns more than 200 data centers with tenants that are global enterprises across nearly 30 countries.
Equinix released Q3 results on Nov. 3. Quarterly revenue increased 10% YOY to $1.68 billion. The company generated net income of $152 million as well, or $1.68 per share, a 120%-plus increase YOY. On the results, CEO Charles Meyers remarked:
“The pandemic has triggered an accelerated need to digitize business models in virtually every segment of the economy, and our strong Q3 results are reflective of this increasing demand for digital services.”
For the quarter, Equinix continued to expand its global platform both organically and through acquisitions. In September, management completed its GPX India acquisition for example, gaining a foothold in India. The REIT also opened 11 more data centers in strategic cities, including New York, Singapore and Frankfurt.
This group anticipates revenue of $6.61 billon to $6.63 billion for the full year, implying a 10% to 11% YOY increase. EQIX stock currently hovers above $780, up nearly 10% YTD. Shares are trading at 10.7 times trailing sales and 6.7 times book value. Potential investors could find value around current levels.
REITs to Buy: iShares U.S. Real Estate ETF (IYR)
52-week range: $81.46 – $111.47
Dividend yield: 1.69%
Expense ratio: 0.41%
Next up, the iShares U.S. Real Estate ETF invests in U.S.-listed REITs. This exchange-traded fund tracks the Dow Jones U.S. Real Estate Capped Index. Since its inception in 2000, net assets have exceeded $7.35 billion.
This fund currently has 87 holdings. In terms of sectors, specialized REITs have the highest weighting (36.6%), followed by residential (14.74%), industrial (11.4%) and retail (10.12%), among others. The top ten holdings account for nearly 42% of the ETF. Some of the leading names on the roster include American Tower (NYSE:AMT), Prologis (NYSE:PLD), Crown Castle International, Equinix and Public Storage (NYSE:PSA).
So far, IYR has gained around 28% YTD and 36% over the past year. Trading at around $110 today, buy-and-hold investors could regard the $100 level as a better entry point here.
Life Storage (LSI)
52-week range: $70.29 – $139.95
Dividend yield: 2.64%
With over 1,000 location across 34 states, Life Storage is one of the largest self-storage operators in the United States.
This company released Q3 results on Nov. 2. For the period, total operating revenue increased 17.4% YOY to $208 million. The REIT generated net income of $70.3 million, or 89 cents per diluted share. A year ago, the metrics had been net income of $37.1 million, or 52 cents per diluted share. Finally, LSI ended the quarter with $136.2 million of cash and equivalents. CEO Joe Saffire remarked the following:
“We continue to aggressively expand our footprint, having achieved a significant milestone during the quarter when we crossed the 1,000-store threshold. We have more than $1.7 billion of wholly owned acquisitions that have closed this year or are currently under contract.”
During Q3, Life Storage delivered double-digit revenue growth in all of its 31 markets. Thanks to such impressive top-line performance, the board recently increased its dividend by 16%, offering a dividend yield of over 2.5%.
LSI stock hit an ATH recently and currently hovers at $130 or so. It’s up 64% so far this year. Shares are now trading at 13.4 times trailing sales. Interested investors may consider waiting for a price dip to take a long position.
REITs to Buy: Vanguard Real Estate ETF (VNQ)
52-week range: $81.23 – $111.27
Dividend yield: 2.96%
Expense ratio: 0.12% per year
Last up on this list of REITs is the Vanguard Real Estate Index Fund ETF. This is one of the most widely-followed real estate ETFs out there. The fund tracks the returns of the MSCI U.S. Investable Market Real Estate 25/50 Index.
Since its inception in 2004, net assets have surged to $78.3 billion. VNQ has 169 holdings. The top four segments of the fund include specialized REITs (37.6%), residential (14.9%), industrial (11.%) and retail REITs (9.8%).
For this name, the ten largest holdings constitute almost 45% of assets. Thus, the fund is weighted in stocks whose performance may significantly impact the price of VNQ. Its leading names include the Vanguard Real Estate II Index Fund (NASDAQ:VRTPX), American Tower, Prologis, Crown Castle International and Equinix.
VNQ has soared more than 29% YTD as well as 37% over the past 12 months. A potential price decline of 3% to 5% would improve the margin of safety for long-term investors here.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.