It hasn’t been a good year for landlords. Publicly traded real estate investment trusts—which own income-producing real estate—have been clobbered in 2020, with the category overall losing 13.6%, compared with a 5.0% loss for the S&P 500 index. When the COVID-19 pandemic struck, whole sectors of the economy shuttered practically overnight, and millions of Americans lost their jobs. For REITs that owned apartment buildings, shopping malls, hotels or office buildings, collecting rent became a tall task, and investors took notice.
But the sell-off presents an opportunity for investors who buy REITs that stand to prosper in a post-pandemic world and avoid the ones that might falter. REITs with properties that require little human contact have bright long-term prospects, says Fidelity Real Estate fund manager Steve Buller. Trusts that own data centers, industrial warehouses for online retailers or cell-phone towers will benefit in a world that is shifting increasingly online, he says. Some of this optimism is priced into the stocks—tech-oriented REITs in the S&P 500 have returned 11% in 2020, on average. But that shouldn’t scare off long-term investors.
Buller sees value in select housing and office REITs that will regain steam as the economy reopens, but he says investors will face an uphill climb investing in trusts that own restaurants, child care facilities, gyms and senior living facilities. REITs that own retail properties, he says, may be permanently scarred, as buying preferences shift toward e-commerce.
The REITs below are poised to thrive. All yield less than the 4.6% average for REITs overall but sport impressive profit-growth prospects, healthy balance sheets and a history of raising payouts.
Note that instead of using traditional corporate earnings yardsticks to measure profitability, REITs use funds from operations, or FFO, which adjusts for depreciation and property sales. REIT distributions are taxed as ordinary income, which can sting high-net-worth investors who hold them in taxable accounts (prices and other data are as of June 12).
Alexandria Real Estate Equities
(symbol ARE, price $159, yield 2.7%)
Alexandria owns, develops and operates life sciences office and laboratory space. The company rents to pharmaceutical and biotech firms such as Novartis, Eli Lilly and Biogen, as well as to research firms and the U.S. government. Dozens of Alexandria’s tenants are focused on COVID testing, treatment and prevention programs.
The firm’s property portfolio, with 30.9 million square feet of space, is 95% occupied. As landlords in other parts of the market saw large amounts of rent go unpaid, Alexandria collected 98.4% of its April rent. Leases among the trust’s top 20 tenants last for 11.4 years, on average.
Analysts at BofA Securities recommend the REIT, citing its strong demand and healthy balance sheet. The firm has hiked its payout by an average of 11% per year over the past decade.
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American Tower
(AMT, $258, 1.7%)
American Tower operates some 180,000 cell-phone and broadcast towers worldwide, with more than half of the firm’s revenues coming from 41,000 towers in the U.S. Wireless providers rent space on the towers to install the equipment that powers their networks, and they sign long leases (typically five to 10 years) that include annual rent hikes of 3% to 5% per year.
Growth in mobile data usage and the number of internet-connected devices should bolster revenues as wireless carriers upgrade their equipment and lease more tower space to keep up with demand. Analyst Matthew Dolgin at investment firm Morningstar says the upgrade to 5G network service should help American Tower boost tenant billings by 7% per year over the next five years.
At 1.7%, the shares yield less than the S&P 500’s 1.9%. But the firm’s payout has grown consistently, with hikes of 23% annualized since 2012. With the stock not far off its all-time high, investors may want to wait for a pullback.
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Equinix
(EQIX, $677, 1.6%)
Equinix operates data centers, which provide cooling, storage and security for equipment that companies pay to house at Equinix sites. Through fiber-optic cables, the firm connects more than 9,700 tenants to their customers, to each other, and to cloud service providers and telecom networks. Equinix allows businesses to access more cloud providers than any competing data-center business, says Dolgin. With more people working from home and businesses shifting to a model that includes a combination of their own hardware and multiple cloud services, Equinix’s prospects look bright, he says.
The stock has returned 36% over the past 12 months and isn’t cheap. But this post-pandemic beneficiary should pay off for long-term investors, says Baron Real Estate fund manager Jeff Kolitch, who expects the firm to boost FFO by an annualized 10% through 2022.
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Invitation Homes
(INVH, $28, 2.2%)
Shares of Invitation Homes, which owns some 80,000 single-family rental homes, plunged 51% between late February and late March as investors feared that tenants would skip rent payments. But collections amid the pandemic hovered around Invitation’s historical average. Less than 2% of tenants deferred a portion of April’s rent.
The stock has bounced back accordingly. But it’s still 15% below its February high, despite looking poised to capitalize on long-term trends, such as a preference among millennial renters for spacious suburban homes as they begin to start families, says Kolitch. Invitation should see strong demand due to the relative affordability of rentals (renting is cheaper than buying in 13 of the firm’s 15 markets) and the dearth of housing supply. Wall Street analysts expect the firm to increase FFO by 3% in 2020, followed by a 10% boost in 2021. Invitation hiked its payout 15% in February.
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Prologis
(PLD, $94, 2.5%)
COVID-induced stay-at-home orders likely accelerated the shift toward internet shopping, says Kyle Sanders, a stock analyst at investment firm Edward Jones. That bodes well for Prologis, which owns and develops high-tech distribution facilities needed to store, track and ship the items you buy online at retailers such as Amazon.com, Home Depot and Walmart.
In February, Prologis acquired rival logistics landlord Liberty Property Trust for $13 billion, boosting the Prologis portfolio to 965 million square feet spread across 4,660 buildings. Strong demand among retailers for well-located warehouses has contributed to the firm’s high occupancy rates (96%) and ability to consistently raise rents, says analyst Chris Kuiper at investment research firm CFRA. The REIT hiked its dividend 9.4% in March.
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