Real estate investment trusts, or REITs, can be a smart choice for investors. Even during the COVID-19 crisis, these trusts could produce dependable returns for investors. This TradingSim article will help investors find a trading strategy to invest in publicly traded REIT stocks. The article will also have a list of REIT stocks that are the top REIT stocks for investors.
Table of Contents
What is a REIT?
A REIT is a company that owns or finances real estate that produces income. Real estate assets can include apartment and office buildings, hotels, and warehouses. Almost 87 million Americans already own REIT stocks through their 401K’s.
How does a company qualify as a REIT?
Companies can qualify as REITs if they meet certain criteria.
Invest 75% of assets in real estate.
Get 75% of income from real estate sales, interest on mortgages, or real estate sales.
Have at least 100 shareholders.
Pay 90% of dividends to investors every year.
Have a board of directors managing the trust.
How do REIT stocks make money?
REITs make profits with rents are paid on leased properties. The corporations pay 90% of their income to investors. They usually pay out monthly dividends to investors. Some of the REITs with the highest dividends pay 100% of their dividends to investors. Many REITs are more likely to be long-term investments.
What are the different types of REITs?
There are many types of REITs, including:
Equity REITs are publicly-traded trusts. They simply own or operate real estate that produces income.
Public non-listed REIT’s don’t trade on any stock exchange. However, they do have to register with the Securities and Exchange Commission(SEC).
Private REIT’s don’t trade on stock exchanges. They also don’t have to register with the SEC.
Mortgage REIT’s or REIT’s buy mortgages and mortgage-backed securities. These REITs buy mortgages to fund real estate that produces income.
“[There’s] one thing I think is very positive for REITs right now,” said Bernstein. “REITs have been very moderately leveraged compared to other real property owners.”
Hoya Capital Real Estate officials noted in a recent report that REITs have better-than-expected balance sheets. The officials wrote that the last Great Recession of 2009 taught REIT’s important lessons about making strategic decisions to save money.
“Owing to the harsh lessons learned during the financial crisis, most REITs have been exceedingly conservative with their balance sheet and strategic decisions in the post-recession period,” said Hoya Capital officials said in the report.
“With the scars still visible enough to be daily reminders of more dismal times, REITs have been ‘preparing for winter’ for the last decade,” said Hoya Capital.
REITs have survived because the yields have been slow, but steady. The trusts persevered “perhaps to the frustration of yield-hungry investors that have turned to higher-leveraged and riskier alternatives in recent years,” added Hoya Capital.
REITs have been able to withstand the economic volatility because of the strategic decisions and stringent actions to keep positive balance sheets.
How can investors find the best REIT stocks?
Even in a bear market, investors can find profits in the top REIT stocks.
These are many ways that investors can find the top REITs for their portfolios.
” It’s all going to be about location. The best investment opportunities will be in those places where the labor market is the least damaged,” said Lebovitz.
Conduct research on REITs
In addition to finding the right location for REITs, investors must conduct thorough research on REITs before investing in the trusts. Investors should decide if they want to focus on one of the many REIT sectors like retail, hotel, or healthcare trusts. Look at charts that track specific REIT’s on TradingSim or read TradingSim blog posts about REITs for information.
Understand the risks of investing in REITs
In addition to researching REITs, investors must understand the risk of REITs. The stocks can be a good form of passive income. However, they’re experiencing challenges in the current stock market. National Association of Real Estate Investment Trusts (Nariet) senior executive vice president Tony Edwards monitors REIT’s. He noted in a letter to the Treasury Department that the stocks had to reduce their dividend payouts to investors. The coronavirus crisis caused the current dividend reductions.
The COVID-19 crisis is also wreaking havoc on tenants. Tenants that are unable to pay rent because of job losses can also cause problems for REITs-and their investors. Edwards wrote about the concern in his letter to the Treasury Department.
“The current COVID-19 has significantly impacted all REITs, but most severely in the lodging, retail, and health care sectors. Many REITs have reduced their dividends because the rents they expect to receive are declining dramatically”, said Edwards.
Edwards noted that was “because of the restrictions put in place or suggested by federal and state at authorities”.
Investors should understand that there are risks as well as benefits when choosing REIT stocks.
Inspect a REIT’s balance sheet.
In addition to the overall risks of REITs, investors can monitor the stocks through five specific metrics.
Funds from operations. A REIT’s funds from operations are a better measure of a trust’s value than earnings per share. Funds from operations (FFO) are a more precise measurement than price-to-earnings ratios as well. FFO’s measure a trust’s generally accepted accounting principles (GAAP) net income and depreciation to measure the worth of REIT’s. The inclusion of depreciation offers investors a more complete look at a REITs cash flow.
Adjusted funds from operations. Adjusted funds from operations (AFFO) doesn’t have an exact formula to measure a REITs worth. AFFO is mostly calculated when FFO is subtracted from capital expenditures.
Debt/EBITDA Ratio. A REITs debt/EBITDA ( earnings before interest, taxation, depreciation, and amortization) ratio is important to credit agencies and investors. The trusts must have a low amount of debt to increase their credit ratings and potential growth. A good debt/EBITDA ratio is usually less than 6:1.
Credit rating. An analysis of a REITs credit rating is another way to determine if it’s saddled with too much debt. A Standard and Poor rating of BBB- and higher is considered a good credit rating.
Occupancy rate. An empty building is not a good sign for a REIT. An occupancy rate of 90% or better is an encouraging sign that a REIT is in good standing.
Data center and retail REIT’s can be advantageous to traders
The list of REIT stocks in this article mostly contains REITs that have data center and multi-tenant properties. Many of these properties are in the fast-growing field of technology. The data center REITs are in wireless technology, an essential need for consumers.
Though retail REITs may be struggling, they are still attractive for investors if they choose the right one. Just as data centers are on the edge of technology, retail REITs that have warehouses for online shopping items are necessary as well. Trusts that heavily use technology can lead to investors to pick the top REIT stocks.
Diversify investments in REIT’s
Even though specific REITs may pay off for investors and are all in real estate, there are still many different types of trusts.
Leibovitz noted that investing in REIT’s and real estate could broaden an investor’s portfolio.
“We still see value in direct real estate as a source of income, and more broadly, as a portfolio diversifier,” said Leibovitz.
“We believe it is about combining REITs and direct real estate, particularly given that REITs provide greater exposure to more forward-looking sectors,” added Leibovitz.
Marijuana REITs an option for investors
In addition to traditional REITs, marijuana REITs are a growing sector of the REIT industry. The legalization of pot in many states has led to a boom in investment in marijuana stocks and REITs.
Innovative Industrial Properties (NYSE:IIP) is a real estate company that invests in medical marijuana properties. In Q1 2020, Innovative Industrial Properties posted revenue of $21.1 million. That’s a whopping 210% increase from 2019’s first-quarter revenue.
Alan Gold, executive chairman of Innovative Industrial Properties, noted that IIP’s strength is in its strong balance sheet.
“One of the pillars of our business strategy has consistently been a conservative, flexible balance sheet,” said Gold.
Diverse REITs can help portfolios
Gold also believes that marijuana REITs like Innovative Industrial Properties can overcome economic instability and continue to grow.
“We believe we are exceptionally well-positioned to not only weather this unprecedented health crisis and economic disruption, but to continue to make real estate investments on a long-term basis with best-in-class tenant operators,” said Gold.
Diversified REIT investments can help investors minimize risk when they choose the top REIT stocks.
Investors can research REIT’s, analyze their balance sheets, and make diversified investments to pick the top REIT stocks.
What kind of investors should pick REITs?
While there is no one type of investor for REITs, there are some key qualities. REITs aren’t high-action, fast- moving investments like Tesla (NYSE:TSLA), so they may be best for passive investors. Investors that don’t want to spend too much time checking on the ups and downs of stocks can invest in REITs for a more hands-off approach to investing.
REITs can be low-risk because most of the tenants take on most of the responsibilities of maintenance and taxes. They are triple instead of the REIT themselves.
Investors that care about dividends can also depend on the top REIT stocks. Many of the best REIT stocks offer reliable monthly dividend payouts to investors.
What are the 10 best REITs for investors?
These are top REIT stocks for investors looking for real estate investments. The list of REIT stocks presents some of the best options for first-time or even expert investors in these trusts.
1. Realty Income
Realty Income (NYSE: O) is one of the best REIT stocks. For over 50 years, the corporation stakes its reputation on being the “monthly dividend company.”
The dividend payout to investors is 5.3%. Realty Income’s dividend reliably increases every year. The payout is so consistent that Realty Income is called a “dividend aristocrat.”
Realty has 6500 properties under long-term leases. While many retail clients are suffering, many of Realty’s retail clients are thriving essential businesses like grocery stores.
Walgreens (NASDAQ: WBA) and Walmart (NYSE:WMT) are necessary stores that provide much-needed services like medicine and groceries to people in quarantine. Because many retail tenants are essential services, several tenants are still able to pay their rents to Realty Income.
Realty Income a top REIT with latest earnings report
Realty Income’s last earnings report showed the perseverance of the REIT. The company’s Q1 revenue totaled $414.34 million. The revenue is a double-digit 16.9% surge from Q1 2019.
“We continued the positive momentum into a strong first quarter of 2020, investing $486 million in property acquisitions and ending the quarter well-positioned with a modest net debt to EBITDA ratio of 5.0x and a fixed charge coverage ratio of 5.5x, which represents an all-time high,” said Roy.
Realty Income is one of the best REIT stocks for traders who want to invest in a steady option for dividends and growth.
The REIT Prologis (NYSE:PLD) is a corporation that owns 797 million square feet of warehouse space that holds e-commerce orders. The company is one REIT that’s benefiting from the growth in e-commerce. Amazon (NASDAQ:AMZN) is one of Prologis’ biggest tenants. Amazon’s profits have only grown since the COVID-19 crisis and Prologic has performed well.
Chief Executive Officer Hamid Moghadam commented that despite the economic slowdown, Prologis tenants like Amazon and Walmart (NYSE:WMT) are seeking more warehouse space. They are clamoring for more warehouse space to meet growing customer demand of online shoppers.
“We’re not seeing those guys slow down, they continue to be very active in making new deals,” said Moghadam. “The strong continue to be taking a lot of space.”
Prologis Q1 2020 revenue strong
On the strength of e-commerce warehouse space, Prologis’ Q1 2020 earnings report was positive. Prologis’ CEO, Hamid R. Moghadam, touted the company’s results.
“Our strong first- quarter operating performance is a result of our long-term focus on the world’s top consumption markets. While the current environment is challenging, we are well-prepared. We have confidence in our team, our strategy and in the strength of our portfolio,” said Moghadam.
Even though Prologis stock fell 0.7% since 2020 started, there’s still some good news. However, that’s far less than the S&P 500’s tumble of 12.6%. Prologis is one of the best REIT stocks for investors looking for a stable stock with growth in e-commerce.
3. QTS Realty Trust
QTS Realty Trust(NYSE:QTS) is the owner of multi-tenant data centers. The REIT has been invaluable because data centers enable online shopping, working from home, and streaming video in this quarantine era.
“Working remotely is a new challenge and opportunity that many in Corporate America are currently facing. The Internet and online workplace are now mission-critical in our daily lives,” QTS chief technology officer Jon Greaves said in a news release.
“There is no evidence of correlation between gross domestic product growth and data center leasing activity,” wrote Bank of America analysts. “Data centers are necessary for corporate and internet continuity.”
Data center ownership was beneficial for QTS in its last quarter. QTS had a strong Q1 2020, as CEO Chad Williams noted.
“QTS generated total revenue and adjusted EBITDA of approximately $126 million and $67 million respectively, representing a year-over-year growth of approximately 12% and 13.5% respectively,” said Williams.
With a 4% yield, QTS is one of the REIT’s with the highest dividend payouts among REIT’s. QTS Realty Trust is performing well with customers’ extra dependence on data centers.
4. Iron Mountain
Another REIT that’s beating the economic crisis is Iron Mountain. It’s a REIT with the highest dividend of almost 10%. The corporation has old-school paper document storage, but is still surviving the economic roller coaster. Iron Mountain revenue for the first quarter in 2020 was $1.07 billion, compared with $1.05 billion in Q1 2019. In its last Q1 2020 earnings report, CEO William Meaney touted the company’s results.
“We delivered very strong performance in the first quarter, with year-over-year growth in organic revenue, Adjusted EBITDA, Adjusted EPS and AFFO. Importantly, the swift and decisive actions we executed in Q4 as part of Project Summit delivered Adjusted EBITDA benefits above our expectations,” said Meaney.
Wide range of services help Iron Mountain
In addition to paper storage, Iron Mountain stores many different types of products. During the COVID-19 crisis, Iron Mountain stored and distributed personal protective equipment to frontline hospital workers. Even though the business has paper storage, Iron Mountain also has a robust data center division as well. Meaney spoke about the data center growth in Iron Mountain’s last earnings report.
“Our core Global Records and Information Management business continues to demonstrate durability, with organic storage rental revenue growth of 2.1%”, said Meaney.
With diversified interests and a robust balance sheet, Iron Mountain is a top REIT stock.
5. STORE Capital
One of the REITs with the highest dividends is STORE Capital(NYSE:STOR). STORE Capital’s stock has a 8.6% yield, an above-average payout to investors.
At the time, STORE Capital CEO Christopher Volk praised the partnership of Berkshire Hathaway and STORE.
“Berkshire Hathaway’s investment solidly positions STORE for continued growth, while adding measurably to our already strong financial position,” said Volk.
“An investment in our company from one of history’s most admired investors represents a vote of confidence in our experienced leadership team and an affirmation of our profit-center real estate investment and management approach,” added Volk.
STORE Capital a top REIT stock in COVID-19 era
STORE is a REIT that leases to retail tenants. Many retail tenants are suffering in this new recession. However, STORE can withstand the economic downturn for a few reasons. STORE’s properties are single-tenant and the tenants are mostly responsible for the properties’ costs.
The REIT doesn’t risk as much capital if the tenants are responsible for costs. STORE is also partially insulated from economic instability because there are annual rent increases built into the leases the tenants have with STORE.
In its last earnings report, STORE chief financial officer, Catherine Long, noted that STORE’s profits grew in its Q1 2020 earnings report.
“First-quarter revenues increased 14% from the year-ago quarter to $178 million, and the annualized base rent and interest generated by our portfolio in place at March 31 was $730 million, an increase of 13% from a year ago,” said Long.
Long also spoke about the increase in STORE’s AFFO in the last quarter as well.
“AFFO increased over 11% to $120 million from $108 million a year ago,” said Long.
Public Storage (NYSE:PSA) is one of the top REITs for investors new to REITs. It’s one of the most well-known real estate trust stocks. The REIT has about 2300 properties in almost 40 states.
Public Storage also pays an attractive 4% yield to investors. The corporation has seemed to survive the economic downturn.
Public Storage appears to be recession-proof
Ironically, the current recession can be good business news for Public Storage. When people downsize from larger houses to smaller ones, they often need Public Storage facilities to store their excess items.
In its last Q1 2020 earnings report, Public Storage reported $716.1 million in revenue. That figure was a 3.9% year-over-year increase. The corporation benefitted from increased rents.
“Yes, the balance sheet’s in great shape, as we’ve discussed on previous quarterly calls. And we’re sitting right now with debt-to-EBITDA, just to touch over 1 times fixed charge coverage around 8 times and over $700 million in cash on the balance sheet,” said Boyle.
Boyle also spoke about Public Storage’s strong liquidity if it wants to purchase more properties in the future.
“So we feel very good about our financial and liquidity position to take advantage of potential opportunity, should it arise, “added Boyle.
Public Storage moves rentals online
Public Storage has also managed to evolve its business beyond physical buildings. Boyle spoke about the company’s available online services to store their items.
“So for those customers that have a storage need, we’re providing space with enhanced precautions in our properties and utilizing our e-rental online lease, somewhat encouraging. Over 80% of last year’s seasonal activity we experienced in April, which speaks to demand for the product even in tough times,” said Boyle.
Public Storage has survived the economic turmoil by having built-in annualized raised rents. The corporation has also grown with its online strategy as well to be one of the best REIT stocks.
Equinix (NASDAQ:EQIX) is a data center REIT that is performing well during the coronavirus crisis. The company has 205 data centers in 25 countries. The stock is showing resilience in this shelter-in-place time.
Equinix expands with Zoom partnership
The corporation just entered a partnership with Zoom (NASDAQ:ZM). The videoconferencing company has been booming with many people working from home. Zoom use Equinix data center vendors for its capacity. The increase in data usage has helped Equinix have a Q1 2020 revenue of $1.445 billion, a 6% year-to-year increase. The revenue is also a jump of 2% from Q4 2019.
“The Equinix business continues to perform well and show resiliency through these times of uncertainty, enabling us to remain focused on the clear set of priorities we laid out at the beginning of the year investing in our people,” said Myers.
Myers also touted how Equinix is “evolving our platform and service portfolio to meet the changing needs of customers, expanding our go-to-market engine to fuel long-term growth, and simplifying our business to drive operating leverage and enhance our customer experience”.
“The cloud customers are super good at efficiency. The physical building might be the same size, but you may have two to three times the energy density, which means more generators, more uninterruptible power supplies, more cooling equipment on the roof,” said Smith.
Equinix has a 1.56% dividend yield and has some of the biggest companies in the world like Zoom and Amazon (NASDAQ:AMZN) using its data centers. With its strong revenue report and expansion, Equinix is a top REIT stock.
8. American Tower Corp
American Tower Corp(NYSE: AMT) is another top REIT stock. The communications company has a strong track record amid the current economic climate.
“So our strong and kind of consistent adjusted EBITDA margins, north of 63%, are consistent double-digit revenue growth and the fact that our return on invested capital was north of 11%,” said Bartlett.
” That strength in the core underlying business, combined with our very strong balance sheet, again, the liquidity position that we’re in at $5.2 billion and pretty low cost of debt at 3.1%,” added Bartlett.
Analysts bullish on American Tower Corp stock
American Tower Corp’s reliable dividend yield of 1.71% and strong earnings report make the corporation one of the best REIT stocks for financial analysts.
Jennifer Fritzsche is an analyst at Wells Fargo that monitors communications REIT’s. She and other Wells Fargo analysts wrote a note to investors about American Tower. The analysts believe the predictability of the long-term tower leases make American Tower Corp recession-proof.
“This predictability of the tower model (with 95% of its revenue recurring and under long term contracts) is a comforting (and beautiful) thing in times of macro-economic pressure,” wrote Jennifer Fritzsche and other Wells Fargo analysts.
MoffettNathanson’s Nick Del Deo also monitors telecom REIT’s like American Tower. He wrote in a note to investors that American Tower can withstand the current worldwide economic instability. The delay in 5G technology rollouts is temporarily impacting American Tower’s properties.
“While too soon to say that American Tower will exit this crisis completely unscathed, FX[foreign exchange] aside, there’s currently no reason to think there will be dramatic long term damage to its results as a result of the pandemic,” wrote Del Deo in a note.
American Tower is a publicly-traded REIT that can be a good choice for investors.
9. Digital Realty Trust
Digital Realty Trust( NYSE: DLR) is a data center REIT that is another top REIT stock. The company has an impressive yield of 3%. Similar to the aforementioned Equinix, Digital Realty has many large corporations as clients. Facebook (NASDAQ:FB), Uber (NASDAQ: UBER), and Oracle( NASDAQ:ORCL).
“We have long prepared for the possibility of a pandemic within our overall business continuity plan to ensure we can maintain this service level,” said Stein.
Stein also noted how data center REIT’s can be successful independent of the slowing global economy.
“As we are all aware, the global economy has ground to a halt,” Stein said. “As you’ve heard me say many times before, data center demand is not directly correlated to job growth, and we are fortunate to be operating in a business levered to secular demand drivers, both growing faster than global GDP growth and somewhat insulated from economic volatility.”
Digital Realty looks to future with wind energy
In addition to owning data centers, Digital Realty is preparing to make them more environmentally sustainable to lower costs. The wind power is expected to provide 260,000 kilowatts of green energy to its Dallas data centers. Stein touted the venture to reduce costs and help the environment.
“We’ve more than doubled our renewable energy sourcing over the past two years and last year our renewable energy efforts avoided 500,000 metric tons of carbon emissions, which is equivalent to taking over 100,000 cars off the road each year,” said Stein.
Digital Realty Q1 2020 earnings beat expectations
In addition to investments in green energy, Digital Realty had success in its last quarter with its existing properties.
Digital Realty had a Q1 2020 net income of $229 million, a 5% increase from last year. The corporation also generated a first-quarter 2020 adjusted EBITDA of $482 million. That’s a 1% growth from Q1 2019.
“Despite the challenging environment, we continued to execute on our strategic plan, closing our highly strategic combination with Interxion as well as the acquisition of the Westin Building in Seattle while delivering another quarter of solid bookings,” said Stein.
“We delivered solid leasing volume with balanced performance across sectors, products, and geographies. We signed total bookings of $75 million, our second-highest quarter on record,” added Stein.
“Our business is highly resilient, and we remain confident that our global platform will continue to deliver sustainable growth for all stakeholders.”
Digital Realty is a top REIT stock for investors with its recession-proof business.
10. SBA Communications
SBA Communications (NYSE: SBAC) is a REIT stock that’s seen its share price rise 164% over five years. The wireless communications data center REIT has a small dividend of 3% and increased by 53% just over the past year. With the growth of wireless technology over the past years, SBA has become a top REIT stock.
“SBA had another solid quarter operationally and financially. And given the unprecedented events occurring around the globe, we feel both pleased and fortunate to be able to report our results,” said Cavanaugh.
“Total GAAP(generally accepted accounting principles) site leasing revenues for the first quarter were $492.3 million, and cash site leasing revenues were $490 million,” added Cavanaugh.
Best REIT stocks can pay off with patience
The above list of REIT stocks can be beneficial to investors- but not overnight. REIT’s have many factors that affect their stock prices, so investors must exercise caution and patience. With TradingSim charts to test out trading strategies, investors can find the best REIT stocks for them.