Buying shares in real estate companies can give you the same benefits as investing in real property. You could be earning passive income from rental revenue and capital gains without hammering a nail.
Real estate stocks give you exposure to companies that develop and manage commercial, residential and industrial properties. These companies share a piece of the action with you through publicly-traded real estate investment trusts (REITs).
Like any other stock, you trade REITs in the open market. These real estate stocks provide a low-cost way of sharing in real estate revenue and gains. There are other stocks that provide exposure to the real estate market. Nevertheless, the publicly-traded REITs category dominates real estate stocks.
The following list of top real estate stocks reflects this.
Highlighted Real Estate Stocks:
- Public Storage (NASDAQ: PSA)
- Simon Property Group (NYSE: SPG)
- American Tower Corporation (NYSE: AMT)
- Crown Castle International (NYSE: CCI)
- Prologis (OTCMKT: PLD)
Overview: Real Estate Stocks
As a means of including the average investor into the lucrative real estate market, the U.S. Congress passed the Real Estate Investment Act in 1960. The bill’s sponsors wanted to duplicate the success of the mutual fund industry as a way of attracting capital to the real estate industry. So, they used the mutual fund equity structure to design a mutual fund for real estate. This became a means for people without much investment capital to benefit from the real estate market.
Although REITs had been around for over 30 years, these funds did not become popular until the credit crunch hit in 1992 or so. The hotel industry, in particular, turned to REITs as a source of financing when the banks turned them away. Residential and industrial divisions soon followed the commercial real estate industry. By the end of 2001, REITs had become the No.1 institutional source of real estate capital with equity of $146 billion — or 39% of capital sources.
By law, REITs must distribute 90% of net income to the shareholders in the form of dividends. The dividend revenue comes from rental income and capital gains. Publicly traded REITs typically have higher dividend yields than other equity investments. Since you can easily trade REITs, you can tap in into this reliable real estate income source without losing your investment’s liquidity.
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Features to Look for in Real Estate Stock
- Earnings growth: The key earnings indicator of real estate stocks is the funds from operations (FFOs). You calculate the FFO by subtracting the gains from the sales of property from the net income and adding depreciation and amortization. The FFO per share is your dividend yield. Ideally, a company should show a gradual increase in this metric. You can find a real estate company’s FFO history in the quarterly income report on the company’s website. The 4th quarter report also has year-end totals.
- Management team: A good management team is imperative to the consistent operation of a real estate company. Poor management can result in cost overruns and sluggish rental income. In the company’s income report, you can use the cash flow summary to get some insight into the management’s operating, investing and financing activities. While you are on the company’s website, take a look at the executive profiles.
- Diversification: Before you decide to buy a real estate company’s stock, take a look at its basket of properties. Are the properties in the same area? Does the company provide only one or two services? Be careful. Real Estate companies with a narrow reach may lack diversification, leaving them subject to the same risk factors such as hurricanes, service specific restrictions or local strife.
Real Estate Stocks to Watch Out for This Year
These 5 real estate stocks have demonstrated qualities worthy of your consideration as you plan for your entry into the real estate market.
Public Storage (NASDAQ: PSA)
Public Storage is an industrial REIT with membership in the S&P 500. With over 158 million net rentable square feet, it claims to be the world’s largest landlord. Public Storage is a buyer, developer and operator of self-storage facilities. Presently, it has thousands of facilities in 38 states and 7 countries. Also, it is a 3rd-party manager of storage facilities.
In Public Storage’s 4th quarter earnings report for 2019, it posted a $10.3 million net operating income. It credited the earnings boost to a 0.07 million increase in Same Storage facilities and a $9.6 million increase in non-same store facilities. At the end of last year, Public Storage’s FFO was $10.58 per share.
Simon Property Group (NYSE: SPG)
Simon Property Group is a real estate trust with active ownership in dining, entertainment, shopping and mixed-use destinations. It owns properties in North America, Europe and Asia. Millions of people gather at its locations — resulting in billions of dollars in annual sales.
The real estate company generates income from leasing space in properties developed into office space, regional malls, community lifestyle centers, hotels and residential properties. For the first 9 months of 2019, Simon Property Group reported a FFO of $5.15 per share.
American Tower Corporation (NYSE: AMT)
American Tower Corporation is among the largest REITs in the world. It is the top independent owner of multitenant communications real estate. This company provides wireless communications infrastructure in 19 countries and 5 continents.
This company has a portfolio of approximately 180,000 communications sites — 41,000 of them are in the U.S. American Tower’s 2019 4th quarter reported a year-long AFFO of $7.90 per share.
Crown Castle International (NYSE: CCI)
Crown Castle is not your prototypical real estate company. It builds, operates and leases over 40,000 cell towers. It also has over 8,000 route miles of fiber networks throughout the country. With its towers and small cells, it owns the fiber that customers use to transfer the data from cell phones, laptops, tablets and smart devices.
Crown Castle partners with technology companies, broadband providers and wireless carriers to provide wireless solutions to individuals and businesses throughout the country. In its 2019 4th quarter earnings report, Crown Castle noted that its FFO was $1.9 million in aggregate or $4.58 per share.
Prologis (OTCMKT: PLD)
Prologis provides the best logistic real estate for customers all over the world. In other words, the company owns, leases and oversees the operation of mega huge warehouses. It has 964 million square feet of space and 4,669 buildings in 19 countries. Also, Prologis offers a built-to-suit service where it manages the construction, design and delivery of a tailored facility to the customer.
For the entire year 2019, Prologis’ core FFO was $3.31 per share — 8.5% higher than in 2018. In its 2019 4th quarter report, Prologis’ 2020 guidance for its core FFO is $3.67 to $3.75 per share.
Biggest Real Estate Movers of the Day
Watching the movers lists can help you find prospective real estate stocks to invest in. Also, you can get a sense of the factors that influence stock prices.
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Significance of Investing in Real Estate Stocks
Real estate stocks in the form of REITs present an investment opportunity for you to earn better-than-average income without assuming much risk or losing liquidity from your investment capital. The 5 real estate stocks we have highlighted are an elite group in this sector.