REITs, or real estate investment trusts, are a popular vehicle among income-focused investors. Why? By buying and leasing out commercial real estate, these entities pay zero income taxes. Just as long as they distribute 90% of their earnings to shareholders in the form of dividends.
In turn, that usually means high yields for REIT stocks. This makes it a great investment, for those looking to generate portfolio income. But while income may be the main focus, the potential for long-term appreciation is in focus as well. Due to their ownership of hard assets (i.e. real estate), they can serve as a great inflation hedge.
However, among the real estate investment trusts offering high yields and solid overall returns are a few that could produce outsized returns. For many names, several catalysts could drive this. Assets sales, for one, may help some REIT stocks surge this year. Improved operations, or organic growth, could drive a spike as well. For some of them, the market realizing there’s a big gap between trading price and underlying value could help them rocket higher over the next twelve months.
So, which real estate investment trusts could become big winners for your portfolio? These seven, a mix of apartment, office, retail and specialty REITs, have ample room to run
- Alexander’s (NYSE:ALX)
- Preferred Apartment Communities (NYSE:APTS)
- City Office REIT (NYSE:CIO)
- Farmland Partners (NYSE:FPI)
- Franklin Street Properties (NYSEAMERICAN:FSP)
- LTC Properties (NYSE:LTC)
- NewLake Capital Partners (OTCMKTS:NLCP)
Now, let’s dive in and take a closer look at each one.
REITs: Alexander’s (ALX)
Managed by another REIT, Vornado Realty Trust (NYSE:VNO), which also owns 32.4% of it, Alexander’s has a unique backstory. Originally a department store chain in the New York City area, it shut down its retail operations in the 1990s. After that, the company took on REIT status, and redeveloped its former store sites.
Currently, Alexander’s leases out six properties in New York and New Jersey, and is working to develop a seventh piece of property. Its flagship building is 731 Lexington Avenue, a mixed-use development that is home to Bloomberg LP’s headquarters.
As a REIT with an office building as its main asset, ALX stock has struggled since the start of the novel coronavirus pandemic. Namely, due to concerns that demand for office space will stay depressed post-pandemic, as the corporate world shifts to a hybrid in-home/remote working environment. This is further heightened by the fact much of the company’s future is in the hands of Bloomberg. It’s the main office tenant at 731 Lexington. If it doesn’t renew its lease, this realty trust is in trouble.
Still, pushed down by this uncertainty, risk/return may be in your favor at its current price. Not only that, this REIT offers a high forward yield of 6.84% to boot. If you believe that the “end of office buildings” narrative is overblown, and want to buy high-quality real estate at a reasonable price? Trading for around $262 per share now, Alexander’s stock is a great way to do so.
Preferred Apartment Communities (APTS)
Despite the name, and the ticker symbol, APTS stock at present could be considered one of the diversified REITs rather than simply a multifamily REITs. Focused on the Southeastern United States, its portfolio includes apartment complexes, shopping centers and office buildings.
Having said that, lately, Preferred Apartment Communities has decided to live up more to its name: divesting non-core properties. In turn, using the proceeds to add more multifamily properties, plus redeem outstanding preferred stock. The market has reacted favorably to this restructuring, as seen by the REIT’s 137% gain over the past twelve months.
With this, it may appear “too late” for new investors. After the big run-up, this isn’t the “deep value” play it once was. Its last earnings and guidance update back in November helped to change the market’s mind on APTS stock. With worries about a dividend cut fading, it no longer sports big discounted valuation.
Yet, at $17 per share, there’s upside potential as it continues to transform into an apartment property pure-play in line with its corporate name. If more market volatility causes it to pull back further as it’s been doing since the start of 2022, you may want to buy it.
REITs: City Office REIT (CIO)
City Office REIT, another of the under-the-radar REITs, also saw a big jump in its stock price last year. Over the past twelve months, this office landlord owns 26 buildings, concentrated in the sunbelt.
Yet, it’s the sale of just a handful of its properties that has made investors in the know excited about CIO stock. As a Seeking Alpha commentator discussed back in September, the REIT made a deal in August to sell its life science office buildings in San Diego’s Sorrento Mesa submarket for $576 million. This deal has since closed, resulting in a $425 million gain.
It makes sense why this was such a needle mover for shares. The proceeds are a big chunk of change compared to City Office’s market capitalization of $774 million. Not only that, this asset sale produced a windfall, while at the same time reducing the REIT’s operating income by less than 10%. City plans to use the proceeds to buy more office buildings in key U.S. growth markets.
Currently paying out a 4.5% dividend, CIO stock has sold off in recent weeks, due to the rate hike uncertainty hitting the markets. Rising rates could impact the company, as it will compress office building valuations. But with it already a bargain around $17.80 per share and possibly becoming more of a bargain if the selloff continues, keep it on your watchlist.
Farmland Partners (FPI)
After talking about more “regular” REIT entities, let’s look at one that focuses on a more niche type of real property. As its name suggests, Farmland Partners owns and leases agricultural land to farmers.
To those who invest in “hot” sectors, FPI stock may sound about as interesting as watching grass grow. Yet while it may sound dull on the surface, it has strong potential as an investment opportunity. Not so much for its dividend yield, which currently comes in at a paltry 1.8%.
Instead, due to its upside potential. First, there’s long-term upside from its ownership of farmland, which over time is becoming more scarce. A rising global population means more demand over time for food, and in turn, more demand for farmland. Second, there’s the upside potential from the REIT’s land being re-zoned as more valuable residential or commercial property.
Third, as a Motley Fool commentator discussed earlier this month, Farmland Partners is moving beyond just owning/leasing out agricultural land. With the purchase of Murray Wise Associates, it’s diversified into property brokerage and management services as well. Treading water after surging from the single digits in early 2021, you may want to take a closer look at this stock, as it changes hands for around $11.45 per share.
REITs: Franklin Street Properties (FSP)
With properties throughout the U.S., Franklin Street Properties is your run-of-the-mill office REIT. Shares have struggled to get back to pre-pandemic price levels, as concerns about a permanent shift to “work-from-home” make the market wary about the future of office space.
Even so, this uncertainty may be more than accounted for in the current valuation of FSP stock. Using the price/funds from operations (P/FFO) ratio, a common metric used to value REITs, shares are cheap. According to stats provided by GuruFocus.com, its P/FFO ratio is 8.8 times. That’s well below the FFO multiple seen with comparable names.
Yes, a low valuation alone does not make a stock a buying opportunity. Cheap stocks like this one can stay cheap if management does little to help realize underlying value. However, management in this situation is taking steps to close the gap between trading price and intrinsic value. During this fiscal year, it plans to sell several properties, obtaining up to $350 million in proceeds.
Planning to put said proceeds towards paying down debt, buying back stock and paying out special dividends, Franklin Street Properties could realize some of its underlying value in the months ahead. Shares popped late last year, thanks to strong quarterly results. This sent the stock from around $5 to around $6 per share. This could happen again if it finds buyers for some of its non-core assets. With that in mind, keep shares on your watchlist.
LTC Properties (LTC)
Back in December, I talked about LTC stock, and its appeal as a REIT that pays out a monthly dividend. In fact, it boasts a high dividend yield of 6.4% no less. But while a key part of why it’s appealing at its current price of about $35.50 per share, that’s not the only reason why you should consider buying this owner of senior housing and healthcare properties.
The potential for it to improve its operating results is another reason to buy it as well. The pandemic had a negative impact on its profitability. This heightened concerns that it would be unable to sustain its current dividend. However, as the pandemic recovery continues, this REIT may have a path back to bring operating income back to pre-pandemic levels.
Moreover, a full recovery will more likely than not help this stock make its way back to above $50 per share. That’s what it traded for before the term “coronavirus” entered the public lexicon.
Now, that’s not to say it’s a slam dunk that results will improve, and the dividend will stay secure. I’ll concede that, as variants help to extend this health crisis, it’s unclear when a recovery will happen for the senior housing segment of the real estate industry. Nevertheless, as uncertainty remains more than priced into shares, upside may exceed downside with this specialty REIT.
REITs: NewLake Capital Partners (NLCP)
NLCP stock is another one of the niche REITs I’ve discussed recently. Specifically, for its exposure to the marijuana legalization trend. That is, this realty trust is involved in providing space to U.S. cannabis companies.
This includes both more industrial properties, used for cultivation and processing, along with retail dispensary buildings. Congress has yet to take action on legalizing pot on the U.S. Federal level. In many U.S. states, however, it’s a legal (and thriving) business. This REIT, which recently went public, is smartly seizing this new opportunity, looking to become a major name in this industry while it’s still in its infancy.
Of course, NLCP stock isn’t the only “pot REIT” out there. In fact, there’s a much larger, better known one you may have heard of, Innovative Industrial Properties (NYSE:IIPR). Even so, this smaller name may be the better choice — and not just because NLCP stock has a slightly higher dividend. Now paying out $1.24 per year, its forward yield comes in at 4.7%, compared to IIPR stock’s 3.1% yield.
Overall, its smaller size may mean a higher growth potential than its larger, more mature peer. Along with this, is the fact it’s listed on the over-the-counter (OTC) market, instead of on a major exchange. That said, an up listing on the stock market could give it a boost as well. At around $26 per share today, right at its IPO price, this is another big upside REIT to add to your watchlist.
On the date of publication, Thomas Niel held a LONG position in ALX stock. He 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.