What are Real Estate Investment Trusts?
A Real Estate Investment Trust (REIT) is a company that owns or finances income-generating real estate. REITs are modeled after mutual funds. Along with diversification and long-term capital gains, they give investors regular income. REITs come in several categories, including Equity, Mortgage, Public Non-Listed, and Private.
So far in 2017, industry experts are seeing quite a bit of potential in REITs for long-term investors who seek growth and income. Following recent patterns, experts say that REITs are poised to continue growing. They note that REITs spiked in the summer of 2016, when the Brexit vote spurred investors to see stability and yield. In 2017, REITs across the board were off of their 2016 peak numbers and lagged behind the market as a whole. The result was underperformance and plenty of potential for growth. They caution that interest rates can affect REIT returns, but not in the same way that many people think. From summer 2004 through summer 2006, the Federal Reserve increased rates from 1.25 percent to 5.25 percent. Consequently, 10-year Treasury rates rose to 5.14 percent. During this time, REITs rose by about 50 percent and dominated the S&P 500. Investors see the same potential today, as the pattern of REIT success is continuing.
Several other factors are leading to REITs' success in 2017. First, the National Association of Real Estate Investment Trust (NAREIT) says that many REITs have reduced debt in recent years. This accomplishment gives them some protection in the face of rising interest rates. Comparatively speaking, REITs are still showing a strong yield. Two examples are Equinox (EQX), which is a data-center operator that has gained 30 percent since the start of 2016, and Prologis (PLD), an industrial REIT. Now, EQX is nearing a yearly high. Prologis (PLD) has gained about 23 percent since January 2016.
This year, investors have named several REITs as particularly promising. Among big REITs, two stars are Public Storage (PSA), which is a self-storage operator, Simon Property Group (SPG), which is a large retailer, and Ventas (VTR), a healthcare facility operator. Sharing a smaller $2.1B market cap are STAG Industrial (STAG) and Preferred Apartment REIT (APTS). These REITs yield a much higher amount than the 1.98 percent found on SPY. Furthermore, the yields of these five REITs have risen in the past half year, while rates on SPY have not. Three of the selected REITs yield a greater amount than VNQ. Even the two that are trailing, SPG and PSA, are showing exceptional payout growth. All five REITs are producing increasing FFO, which increases the likelihood that they will have a future dividend growth. All five real estate REITs are also paying out sizeable percentages of funds by their nature of being dividends. Strong REITs can return between 85 and 90 percent of their FFO and still maintain a strong payout. With a price to FFO (TTM) of 23.1, PSA has a comparatively high valuations check out. However, experts expect PSA's growth to continue in the future as consumer spending rises and segments of the population downsize. VTR also has a relatively high valuations check out, but it also has a covered dividend and continued growth from changes in the national population.
Innovative REITs are also catching investors' attention. Many of these trusts follow a net-lease business model, which entails owning a collection of single tenant properties. These properties are then lease on a long-term basis, called "triple-net" leases. Triple-net leases require tenants to pay all property expenses like upkeep and maintenance. They also have to pay insurance and property taxes. Through this method, the REIT simply collects revenue from monthly checks, and it is absolved of all property expenses. One such real estate investment trust is STORE Capital. STORE was launched by a group of investors with 30 years' worth of experience in net-lease property management. Investors like this REIT because it contains a higher yield and a higher dividend growth than many older REITs. In early 2017, Warren Buffet's Berkshire Hathaway purchased nearly a 10 percent stake in STORE. Its current yield is 4.65 percent, and experts predict that its dividend growth will boost share price appreciation in the coming years. The STORE portfolio extends to 48 states and includes 1,700 properties that are leased to over 370 customers. The average lease term in this portfolio is 14 years. Each quarter, the company adds approximately 70 additional properties to the portfolio.
Industry experts are also watching data center REITs. These REITs, they say, are promising because the need for storage space and hardware continues to increase. That demand drives the price of data center REITs. Data centers are particularly valuable because they safely store data and produce large amounts of continuous power. They also offer air conditioning and provide tenants with physical security. One data center REIT is QTS Realty Trust. QTS Realty Trust includes a suite of services for business clients, along with in-house management and cloud-based services. It is located in Overland Park, Kansas. QTS extends nationwide and either owns, manages, or operates a total of 25 data centers. Its facility in Atlanta, GA covers 969,000 SF and is one of the largest in the world. In the past years, QTS Realty Trust's dividends have increased by about 10 percent annually. Shares in this REIT yield approximately 3 percent, and prices average $1.56 per share.
Another notable REIT is Government Properties Income Trust. This REIT owns and operates properties that are primarily leased out to government agencies and tenants. This REIT, which is the largest landlord of the US government, owns about 75 properties in 31 states across the country. In total, this REIT covers about 11.5 million SF. In the past, government tenants have stayed situated for a longer period of time than clients in the private sector. In some cases, they've stayed in the same spot for 20 years or more. This long tenure increases their reliability and investment benefits. Experts say that Government Properties, with a dividend yield of 9.25 percent, looks promising. In June 2017, Government Properties announced its intent to gain First Potomac Realty Trust. This acquisition, when complete, will increase the REIT's exposure in Washington, D.C.
Next is Virginia-based AvalonBay Communities (AVB). This REIT owns or holds ownership interest in nearly 285 apartment communities situated across 10 states. Each community has about 82,500 apartment homes. All communities are located in high barrier-to-entry markets that have a low volume of space zoned for apartments and a lengthy process for entitlement. Presently, AVB has a current quarterly dividend of $1.42. That amount is equal to an annual payout of $5.68 and a yield of about three percent. In the past six years, this REIT has increased its annual divided by about eight percent. In the past 20 years, this REIT has maintained a 5.3 annual dividend growth. It has also gone only three years without a dividend boost.
Camden Property Trust (CPT) is another quality REIT. This REIT owns and operates over 150 residential apartment units in nine states. Each community has more than 53,000 apartment units. CPT, founded in 1993, is based out of Houston, Texas. It currently yields a $0.75 quarterly dividend, which equals about a $3.00 annual payout and has a 3.4 percent dividend yield. In 2016, this REIT saw a rise in its total annual dividend for the past year to $7.20. Its regular dividend also rose steadily during the past seven years.
Colony NorthStar has a $1.08 dividend per share annually. This translates to a 7.7 percent yield. Investors note Colony NorthStar's cheap rate and the fact that it trades below 10 times the forward FFO multiple. The Vanguard Group is a notable investor with 68.5 million shares. The Baupost Group holds about 29 million shares, and BlackRock has 30.9 million shares.
DiamondRock Hospitality (DRH) contains a portfolio of hotels in major cities, including NYC, Chicago, and Boston. Experts predict that the company has newly renovated properties, which should help its growth. Mack-Cali Realty (CLI) is one of the largest REITs. It is undergoing a change from old suburban office spaces to high-rise office buildings and multi-family properties. Its strategy is to bring capital into up-and-coming waterfronts in cities in New Jersey across from NYC and near major transit hubs.
Finally, investors expect Vereit (VER) to become a healthy REIT again. An accounting scandal brought down the REIT in 2014, which gave it tremendous debt and a mismanaged portfolio. With a 6.6 dividend, however, it's now on the rebound.