After two solid months of appreciation, real estate investment trusts (REITs) gave back some of those gains in January. The Vanguard Real Estate Index Fund ETF (NYSE: VNQ), which contains REITs and other real estate stocks, declined 5.87% for the month.
The good news is that some of the overbought conditions that were present at the start of the new year are easing, and REITs could be setting up for another leg higher. But inflation data and the 10-year Treasury will be two key factors to watch for the likely direction of REITs this month. Remarks by Federal Reserve Chairman Jerome Powell on Jan. 31 triggered an initial sell-off of REITs, only to bounce back smartly the next day. But a stronger-than-expected jobs report on Feb. 2 put a damper on interest rate-sensitive REITs.
The following list of REITs contains three distinct categories (Best High Yield, Best Growth and Best Value), while using a five-year performance time frame, and provides what could be the best opportunities in the REIT sector moving into February.
Best High-Yield REITs
When it comes to choosing REITs, investors must consider the overall recent performance, safety and reliability of the dividend and the company to chase high-yielding dividends.
Easterly Government Properties Inc. (NYSE: DEA) is an office REIT that acquires, develops and manages Class A commercial properties and leases them solely to government agencies through the General Services Administration. Easterly Government Properties owns 90 properties across 26 states. Its occupancy rate is 98% and its weighted average lease term (WALT) is 10.4 years.
Easterly has been on an acquisition spree. On Oct. 5, it announced the purchase of a 97,969-square-foot Department of Homeland Security facility in Atlanta and a 95,273-square-foot specialized facility in Anaheim, California. On Oct. 23, it announced the acquisition of a 35,005-square-foot U.S. District Courthouse in Newport News, Virginia.
In recent news, Co-founder and former board Chairman Darrel W. Crate became CEO on Jan. 1, replacing retiring CEO William C. Trimble III.
On Jan. 11, Easterly announced that it received an investment-grade issuer credit from the Kroll Bond Rating Agency of BBB with a stable outlook.
On Jan. 25, Easterly announced it has extended a $100 million unsecured term loan from 2016, which will now mature on Jan. 30, 2025.
Brightspire Capital Inc. (NYSE: BRSP) is an internally managed New York-based mortgage REIT (mREIT) that supplies floating rate capital to multifamily, office, hotel, retail and net-lease real estate investments, most often consisting of senior mortgage loans. Brightspire presently has 92 loans in its portfolio and has about $4.5 billion in assets under management.
On Oct. 30, Brightspire Capital announced its third-quarter operating results. Earnings per share (EPS) of $0.28 beat the estimates of $0.21 and bested its third-quarter 2022 funds from operations (FFO) of $0.25. Quarterly revenue of $59.09 million handily beat the estimates of $29.36 million and was an improvement from revenue of $55.23 million in the third quarter of 2022.
This was a vast improvement over the last four quarters, in which Brightspire had produced EPS of =negative 0.06, 0.03, 0.03 and negative 0.16, leading to a payout ratio well over 100%.
On Jan. 22, Barclays analyst Terry Ma maintained an Equal-Weight rating on Brightspire Capital and raised the price target from $6 to $8.
Brightspire pays a quarterly dividend of $0.20 per share. The annual dividend of $0.80 per share yields 11.07%. However, this is of concern because the dividend is well above the earnings per share. It might therefore be prudent to wait until after the fourth quarter earnings are announced on Feb. 21 before entering a position. If earnings aren’t rising, the dividend could be at risk. However, with interest rates declining recently, the outlook for improved earnings has brightened.
Global Medical REIT Inc. (NYSE: GMRE), remains on this list as one of the best high-yield REITs to buy in February.
Global Medical REIT is a Bethesda, Maryland-based net-lease healthcare REIT that owns and operates 185 properties with 268 tenants and over $4.7 million net leasable square feet of specialized facilities that it leases to healthcare systems and physician groups throughout the U.S.
After a strong two-month run, Global Medical was due for a pullback and its total return for January was negative 8.09%. However, the five-year total return is 47.36% and the 10-year total return is 3,664%.
Despite the pullback, on Feb. 2, ISS-EVA maintained an Overweight rating on Global Medical.
On Nov. 6, Global Medical reported its third-quarter earnings. FFO of $0.22 per share beat the estimates of $0.21 but was down from $0.25 year over year. Revenue of $35.49 million missed the analyst consensus estimate of $36 million but was a slight increase from revenue of $35.35 million in the third quarter of 2022.
Fourth-quarter earnings will be announced on Feb. 26.
Global Medical pays a $0.21 quarterly dividend and the annual $0.84 dividend presently yields 8.22%. The payout ratio of 97.6% has been moving in the right direction over the past two quarters but is still far too high, so the dividend is likely stuck where it is until FFO begins to grow again.
Best Growth REITs
When looking for the best growth REIT stocks to purchase, investors can feel confident about their selections by considering the long-term price history of the company, regardless of where that price is today. These three REITs have a terrific history of appreciation but have lower dividend yields than many other REITs.
Equinix Inc. (NASDAQ: EQIX) is a Redwood City, California-based specialized REIT that owns and operates a network of over 250 data centers across 71 major metropolitan areas, providing critical infrastructure to over 10,000 customers and 260 Fortune 500 companies across 32 countries. Founded in 1998, Equinix has 456,000 total interconnections.
On Oct. 25, Equinix announced its third-quarter operating results. Funds from operations of $5.97 easily beat the estimates of $5.39 and beat the FFO of $5.30 in the third quarter of 2022. Revenue of $2.06 billion was in line with estimates and was an improvement from revenue of $1.8 billion in the third quarter of 2022.
At the same time, Equinix announced a hefty 25% increase in its quarterly dividend from $3.41 per share to $4.26 per share. The annual dividend of $17.04 now yields 2.12%.
Equinix reduced its 2023 full-year revenue guidance from $8.171billion-$8.251 billion to $8.166 billion-$8.206 billion, but analysts have remained positive on the stock. On Jan. 2, Wolfe research analyst Andrew Rosivach upgraded Equinix from Underperform to Peer Perform. On Jan. 24, Barclays analyst Brendan Lynch maintained Equinix with an Equal-Weight rating and raised the price target from $720 to $788.
Also on Jan. 24, Equinix announced an affiliation with Nvidia Corp. (NASDAQ: NVDA) in which Equinix will manage cloud service privately for companies using Nvidia’s DGX systems, networking and the Nvidia AI Enterprise software platform.
After declining by 1.18% in December, Equinix had a total return of 2.38% in January. It remains one of the best growth REITs with a five-year total return of 128.99% and 432.87% over the last 10 years.
Iron Mountain Inc. (NYSE: IRM) is a Portsmouth, New Hampshire-based specialty REIT focusing on information management and storage, data center infrastructure and asset lifecycle management. Iron Mountain was founded in 1951 and has more than 225,000 customers worldwide. In recent years, it has shifted its focus from paper storage to data storage.
On Nov. 2, Iron Mountain reported mixed third-quarter operating results. Normalized FFO per share of $0.76 missed the consensus estimate for $0.78 per share but was up from $0.71 per share from the previous quarter and was in line with the third quarter of 2022. Revenue of $1.39 billion was below the estimate of $1.41 billion but up from $1.29 billion in the third quarter of 2022.
The annual dividend of $2.60 per share presently yields 3.75%, which is still significantly higher than most other growth-oriented REITs.
Iron Mountain had a total return of negative 1.62% in January after gaining over 18% in the last two months of 2023. Its excellent five-year total return is 121.16% and its 10-year total return is 286.65%.
Analysts have recently been positive on Iron Mountain. On Jan. 23, Stifel analyst Shlomo Rosenbaum maintained a Buy rating on Iron Mountain and raised the price target from $65 to $76. One day later, Barclays analyst Brendan Lynch maintained an Overweight rating on Iron Mountain and raised the price target from $69 to $79.
The one cautionary note for investors is that Iron Mountain’s P/FFO is now
23.22, so Iron Mountain is best purchased on a pullback, perhaps to the $65 level. Its most recent closing price was $69.28.
American Tower Corp. (NYSE: AMT) is a Boston-based specialty REIT that calls itself “a global leader in wireless infrastructure.” Founded in 1995, American Tower owns, operates and develops wireless and broadcast communications real estate. Most of its business is leasing space on wireless and broadcast towers and it also leases portions of the land below the tower for equipment storage. Typical tower components are coaxial cabling and fiber optic cables.
American Tower has a presence in 225,000 global communication sites across 25 different countries on six continents. About 42,000 of those properties are in the U.S. and Canada, and approximately 183,000 are international properties. Contracts usually have a term from five to 10 years with renewal options and annual lease escalators of approximately 3%.
On Oct. 26, American Tower announced its third-quarter operating results. FFO of $2.58 beat the estimates of $2.51 and FFO from the third quarter of 2022 of $2.36 billion. Revenue of $2.82 billion beat the estimate of $2.76 billion and the revenue of $2.67 billion in the third quarter of 2022.
Most analysts are bullish on American Tower. On Jan. 24, Barclays analyst Lynch maintained American Tower with an Overweight rating but lowered the price target from $229 to $224. On Dec. 14, HSBC analyst Luigi Minerva initiated coverage of American Tower with a Buy rating and announced a price target of $245.
Also on Dec. 14, American Tower announced an increase in its quarterly dividend from $1.62 to $1.70 per share. The new annual dividend of $6.80 per share yields 3.43%.
In recent news, on Jan. 5, American Tower announced it had sold 100% of the equity interests in its India operations to Data Infrastructure Trust for approximately $2.5 billion. The transaction is expected to close in the second half of 2024.
On Feb. 1, long-time President and CEO Tom Bartlett retired from his positions and was replaced by Steven Vondran, who has been acting as executive vice president and global chief operating officer since November.
After sizable gains in November and December, American Tower pulled back in January by 10.58%. It’s been a leading growth REIT for many years with five- and 10-year total returns of 41.30% and 192.80%, respectively.
Best Value REITs
Long-term investors looking for undervalued REITs should consider solid companies with good track records over the years who have fallen out of favor with Wall Street. These REITs now provide solid dividend yields for income investors, have low price/FFO ratios and over time may provide solid appreciation once economic conditions improve.
Independence Realty Trust Inc. (NYSE: IRT) is a Philadelphia-based residential REIT with 120 multifamily properties with 35,427 units across 13 states, with about 70% in the Sun Belt regions. Its investment strategy is focused on purchasing properties near major employment centers, with good school districts and higher-class retail stores. Independence Realty had a third-quarter average occupancy rate of 94.6%.
Since Nov. 1, Independence Realty has achieved the second-best total return among the residential REIT subsector with a total return of 20.38%.
Its price/FFO ratio is 13.05, well below the P/FFO of peers such as AvalonBay Communities, Inc. (NYSE: AVB) at 16.35 and Camden Property Trust (NYSE: CPT) at 14.03.
Independence pays a quarterly dividend of $0.16 per share and the annual dividend of $0.64 per share presently yields 4.18%. The dividend was cut from $0.18 to $0.12 in July 2020 because of COVID-19, before being raised to $0.14 in June 2022 and $0.16 in June 2023.
On Jan. 3, Independence Realty announced the closing disposition of four properties for $200.7 million. With these sales, after paying off the four property loans, Independence was able to pay off $84.5 million in debt on its line of credit.
As for analysts, while RBC Capital Markets and JMP Securities both have Outperform ratings on Independence, BMO Capital Markets analyst John Kim downgraded it from Market Perform to Underperform on Dec. 15 and announced a $15 price target.
Independence Realty pulled back in January after a strong December performance, with a total return of negative 5.29%. Its five-year total return is 69.93% and the 10-year total return is 158.77%.
Realty Income Corp. (NYSE: O) replaces Summit Hotel Properties Inc. (NYSE: INN) as one of the best value REITs to buy in February.
Realty Income is a San Diego-based, triple-net lease REIT, with over 13,250 properties around the world. The “Monthly Dividend Company,” as it’s widely known, is a member of the S&P 500 and an S&P 500 Dividend Aristocrat. The occupancy rate for its portfolio is 98.9%.
Realty Income is one of the foremost REITs today and with good reason. Its total return since Jan. 1, 1995, is 1,189.63%.
On Dec. 12, Realty Income announced an increase in its monthly cash dividend from $0.256 to $0.2565 per share. The new annualized dividend amount of $3.078 presently yields 5.64%. This was the 123rd dividend increase since 1994 and the 105th consecutive quarter of dividend increase.
On Jan.10, Mizuho analyst Vikram Malhotra maintained a Buy rating on Realty Income and raised the price target from $58 to $60. The next day, RBC Capital analyst Brad Heffern maintained Realty Income with an Outperform rating and also raised the price target from $58 to $60.
On Jan. 19, the previously announced merger between Realty Income and Spirit Realty Capital Inc. (NYSE: SRC) was approved by Spirit Realty shareholders. The merger closed on Jan. 23.
After a rally that brought it up to $59.55, Realty Income is now trading near $54. With a P/FFO of 13.43 and a history of trading above $70, this very popular REIT is now an excellent value play.
Four Corners Property Trust Inc. (NYSE: FCPT) is a Mill Valley, California-based diversified REIT, with a focus on owning net-leased restaurants, medical and dental services, automotive services and other retail properties in the Sun Belt regions of the U.S.
Four Corners was created in November 2015 with 418 restaurants spun out from Darden Restaurants Inc. (NYSE: DRI). As time has progressed, many of the Darden properties were sold off, but Olive Garden and LongHorn Steakhouse restaurants still make up about 47% of Four Corners’ total rents, down about 4% in recent months.
Over the past seven years, Four Corners has steadily acquired more diversified properties and its most recent total portfolio was 1,106 long-term leased properties with 148 brands across 47 states. Four Corners has a strong occupancy rate of 99.8% with a weighted annual lease term (WALT) of eight years.
On Nov. 10, Four Corners Property Trust announced an increase in its quarterly dividend from $0.34 per share to $0.345 per share. The new $1.38 annual dividend presently yields 5.75%.
Four Corners Property Trust has increased its revenue for 13 consecutive quarters as it continues its massive acquisition spree. Its main strategy is to secure properties in a cap rate range from 6% to 7%.
The same aggressive acquisition plan was in effect at the end of 2023, as Four Corners purchased two Tire Discounters stores and two Popeyes restaurants.
On Jan. 5, Four Corners continued its strong acquisition spree from 2023, by acquiring two Oak Street Health Properties in Iowa and Louisiana for $4.2 million. Both properties are preleased on long-term net leases.
On Jan. 8, Raymond James analyst RJ Milligan maintained Four Corners with an Outperform rating and lowered the price target from $29 to $28.
Four Corners had a total return of negative 5.29% in January. The ongoing acquisitions in less risky, higher cap rate properties and high occupancy rates bode well for Four Corners to perform well in the months ahead.
Four Corners Property Trust will report its fourth-quarter operating results on Feb. 14.
Recent REIT Analyst Ratings
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REIT Sector Performance
You can learn quite a bit from how the sector performs as a whole, reflecting on figures collected by Benzinga.
What to Look for When Choosing The Best REITs
While publicly-traded REITs are bought and sold on the stock market like any other publicly-traded company, REITs are a unique asset class that needs to be analyzed differently than other stocks.
Funds From Operations (FFO)
If you're familiar with stocks, you're most likely familiar with terms like earnings per share (EPS) and price-to-earnings ratio (p/e ratio). However, these metrics don't offer much help when looking at an equity REIT.
To understand a REIT's true cash flow, you have to look at their funds from operation (FFO). Since real estate is a depreciable asset, a REIT's reported net income includes a significant depreciation expense. It also includes capital gains and losses from the sale of properties, which don't represent what investors can expect the company to earn on a consistent basis.
FFO adds depreciation back into the REIT's net income and takes out any gains or losses on the sale of property, providing a more accurate picture of a REIT's true earnings.
To use FFO as a way to value REITs, we divide the REIT's current share price by its FFO per share to get a price to FFO ratio. We then compare the price to FFO of the different REITs in each real estate sector to find value opportunities.
REITs have to carry a lot of debt in order to finance the properties they purchase. This is especially true because REITs are required to pay out 90% of their taxable income to shareholders in the form of dividends. This doesn't leave REITs with the ability to stockpile a lot of cash.
It's important to make sure that the REIT you're investing in isn't carrying too much debt, though. The easiest way to do this is by looking at their total debt compared to their earnings before interest, tax, depreciation and amortization (EBITDA). This is called a debt to EBITDA ratio.
For instance, if a REIT has a total of $1 billion in debt and their annual EBITDA is $250 million, you would divide $1 billion by $250 million to get a debt to EBITDA ratio of 4.
Ideally, you want to look for REITs with a debt to EBITDA ratio somewhere between 4 and 6. Anything above 6 and their balance sheet starts to look risky. You also want to make sure that they're not too conservative with their debt. A debt to EBITDA ratio below 4 can indicate that they're using too much cash that could be going to investors instead of utilizing debt.
A solid REIT management team will use a reasonable amount of debt to maximize their overall returns. This means more growth and higher dividends being paid to investors.
One of the greatest advantages to REITs is their dividends. On average, REITs pay out significantly higher dividends than most other dividend stocks.
You want to be careful not to get caught in a yield trap, though. Some REITs may increase their dividend payments to an amount they can’t sustain in order to attract or keep shareholders. They also may put off cutting dividends when their FFO has dropped. In either case, buying a REIT with a dividend it can’t sustain is a quick way to lose money.
To get an idea as to whether a REIT’s dividend is safe, you’ll want to look at the FFO payout ratio. This compares the company’s FFO per share to its dividend rate.
For instance, if a REIT has an FFO per share of $2 and a dividend payment of $1.50 per share, you’ll simply divide the dividend rate by the FFO per share to get 75%.
Ideally, the REIT’s FFO payout ratio will be somewhere between 70% - 80%. However, a lower payout ratio is fine if you’re happy with the yield. A slightly higher payout ratio isn’t necessarily a red flag as long as they’ve consistently maintained that payout ratio while either keeping or increasing their dividend payments over time.
The Real Estate
You can’t forget that investing in a REIT is essentially investing in a real estate portfolio. If you were buying properties directly instead of investing in a REIT, you would want to invest in assets that would provide you the greatest potential return with the least amount of risk possible. You want to look at REITs the same way.
If you’re looking for a dependable REIT, you’ll want to look at ones that invest in a property type with a strong outlook. For instance, if you think shopping malls are doomed you won’t want to invest in a REIT that owns a lot of shopping malls.
A REIT ETF is an exchange-traded fund that invests in REITs and other real estate stocks. These funds typically follow a REIT index and have a diversified portfolio with investments spread out across multiple companies.
Investing in The Best REITs
A REIT’s recent financials provide a great basis for choosing the best ones to buy, but major changes can happen between quarterly filings. Before investing in a real estate stock, be sure to look for recent news about any acquisitions, dispositions, offerings, or any other relevant news that can affect their future performance.
Other intriguing REITs include the Plymouth Industrial REIT, Emirates REIT, U.S. REIT ETF and the Apple Hospitality REIT.
You can learn more about how to use REITs to invest in the real estate market with our guide on How to Invest in REITs.
Benzinga’s research team has identified several undervalued REITs with major upside and strong dividends.
Get weekly updates on the REITs we’re watching and take advantage of this major opportunity in the market right now.
Related content: BEST HIGH-YIELD REITS
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