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All Contents © 2019The Kiplinger Washington Editors
By Lisa Springer, Contributing Writer
| May 2, 2018
When real estate investment trusts (REITs) are mentioned, most investors think of office space, apartment buildings and shopping malls. However, the REIT universe includes a much wider variety of properties. Today investors can purchase REITs that own cell towers, data centers, billboards, timber and even farmland.
Like traditional REITs, these niche players offer reliable dividends, but with the added bonus of better income opportunities and even unusual growth potential.
They also boast less risk exposure to interest-rate swings. Traditional REITs sometimes lose value when interest rates spike because the present value of future dividends declines. The performances of most niche REITs, however, are more aligned with the customers they serve. An example is datacenter REITs, which have risen in value due to the expanding data storage demands of their tech customers.
Niche REITs also may improve a portfolio’s diversification thanks to their low correlations with other stocks. Timberland has less than a 14% correlation with the S&P stocks, and farmland is a low-risk investment that performs well during stock market meltdowns or spiraling inflation. Diversification is in part why Harvard’s and Yale’s endowment funds own timberland and farmland assets.
The best reason to own specialized REITs, however, may be to gain low-risk exposure to high-growth industries. Data center REITs are tech-focused real estate plays on big data, cloud computing, streaming content and social media. With the world’s data volume forecast to double every two years, these tech sectors are booming. Similarly, cell tower REITs provide infrastructure that supports exponential growth in mobile data and smartphones.
Investors who own these 10 “unusual” REITs may collect traditionally high yields while also capturing outsize growth opportunities.
Data is as of May 1, 2018. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Companies are listed in alphabetical order. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $60.3 billion
Dividend yield: 2.0%
American Tower (AMT, $135.10) is a multinational infrastructure REIT that owns more than 150,000 communication sites across 16 countries. Its network consists of more than 40,000 cell towers in the U.S., mainly deployed in suburban and rural markets; 109,000-plus cell towers deployed internationally; and more than 900 antenna systems.
This REIT has invested nearly $20 billion over the past five years to acquire and construct communications assets. Future plans call for stepped-up investments in emerging markets like Latin America and South Africa. American Tower recently expanded into India by acquiring 20,000 cell towers from Idea Cellular and Vodafone (VOD). The REIT expects this $1.2 billion deal to contribute $120 million to 2018 gross profit.
In the U.S., American Tower has immense opportunities to leverage existing relationships with major telecom customers such as Verizon (VZ) and AT&T (T) by assisting these carriers in rolling out 5G services over the next few years.
Few REITs can match American Tower on dividend growth. Payments have grown 24% per year since the REIT began paying dividends in 2012, and American Tower anticipates hiking dividends 20% this year while maintaining payout in a 40% range. AMT already announced a 7% dividend hike in March, though more should be coming, as the REIT increases its dividends every quarter.
Last December, Oppenheimer Research selected American Tower as one of its three top picks in the telecommunications sector.
Market value: $458.6 million
Dividend yield: 7.7%
CorEnergy Infrastructure Trust (CORR, $38.96) is the only infrastructure REIT focusing solely on energy assets such as oil and gas pipelines, storage terminals and transmission and distribution facilities. Oil and gas drillers lease its assets under long-term, triple net agreements. Participation clauses are built into the leases to increase the REIT’s returns at higher utilization rates.
At present, CorEnergy owns two natural gas pipelines in the Midwest; a gas-liquids gathering, processing and storage system in the Southwest; an undersea-to-onshore oil pipeline and storage terminal on the Gulf Coast; and a crude oil and petroleum products terminal in the Pacific Northwest.
The REIT’s largest asset is the Grand Isle Gathering System, which consists of 153 miles of undersea pipelines transporting oil and gas from six fields in the Gulf of Mexico. The driller operating five of these fields plans six new wells in 2018, its most robust drilling program in four years. These fields also are served by CorEnergy liquids gathering systems.
Its second major asset is the Pinedale Liquids Gathering System, comprised of 150 miles of pipeline and four storage facilities in the Pinedale field – one of the most prolific gas-producing regions in the U.S. Ultra Petroleum leases the system under a 15-year triple-net participating lease.
The REIT plans to acquire more energy assets, especially energy pipelines and storage terminals. CorEnergy focuses on long-lived, strategically located assets that are vital to the operations of its customers and with high barriers to entry.
CorEnergy has grown earnings 47% annually over the past half-decade. It also has paid 10 consecutive quarterly dividends of 75 cents, and management believes the $3 annual dividend is sustainable in 2018.
Market value: $3.6 billion
Dividend yield: 3.6%
CoreSite Realty (COR, $105.44) owns 20 data campuses in eight major American markets. The urban markets served by the REIT account for 20% of the U.S. population and 27% of GDP. CoreSite has significant expansion capacity across its portfolio and could increase its datacenter footprint by more than one-third simply by fully utilizing the land and buildings it already owns.
Expansion and development projects are underway at six of its eight data campuses. Expansion projects at data campuses in Washington, D.C., northern Virginia and Denver will be completed during 2018. New facilities being constructed in Los Angeles and Silicon Valley are scheduled to be operational in mid-2019.
CoreSite has more than 1,200 customers, many of which are Fortune 100 companies. The REIT benefits from robust data storage demands that are supporting high lease renewal rates and rising rents. Last year, CoreSite renewed 871 leases at rents averaging 7.3% higher and signed 478 new or expanded leases.
The REIT has leveraged 60% growth in its customer base to generate 23% annual growth in funds from operations (FFO, an important measure of REIT profitability) since 2011 and 36% annual dividend growth. COR even improved its payouts twice in 2017; an 11% increase at mid-year was followed by a 9% dividend hike in the fourth quarter.
Keybanc analyst Jordon Sadler recently upgraded his rating on the stock to “Overweight” (equivalent of buy), noting steady FFO growth fueled by new leases and facility expansion.
Market value: $41.9 billion
Dividend yield: 4.0%
Crown Castle International (CCI, $100.86) is the nation’s largest provider of communications infrastructure. The REIT owns more than 40,000 cell towers, 50,000 small cells and 60,000 route miles of fiber, and has an infrastructure presence in 23 of the top 25 U.S. markets.
CCI invested more than $10 billion last year to expand its communication infrastructure. Crown closed its largest deal ever, too, paying $7.1 billion for Lightower, which expands its presence in Northeastern cities like Boston, New York and Philadelphia, where demand for data capacity has expanded exponentially.
Crown recently signed two new long-term customer agreements and raised its 2018 outlook. Longer-term, the REIT expects high levels of network investment by major customers to drive robust leasing activity.
FFO per share has grown 14% annually over the past decade. Crown began paying dividends in 2014, and looking forward, it expects to improve its payout by about 7% to 8% per year.
Thirteen of the 21 analysts following Crown rate the shares “Strong Buy” or “Buy,” and none recommend selling the stock.
Market value: $21.5 billion
Dividend yield: 3.5%
Digital Realty (DLR, $105.01) is a leading data center REIT that operates 205 data storage facilities in 32 world markets. It provides storage, colocation and interconnection services to roughly 2,300 customers across North America, Europe, Asia and Australia.
Data demands from new cloud computing applications such as artificial intelligence, virtual reality and the Internet of Things are fueling the REIT’s growth. Digital Realty’s FFO per share rose 7% last year, and the company has guided for double-digit FFO growth in 2018.
The REIT plans to grow through acquisitions and by entering new markets. For instance, it paid $6.2 billion last year to acquire DuPont Fabros Technology, giving it a bigger footprint in the U.S. More recently, the REIT formed a 50/50 joint venture with Mitsubishi to enter Tokyo, a long-time target, and closed a $315 million data center acquisition that builds its presence in the metro Chicago market.
Digital Realty regularly upgrades its portfolio through a capital recycling program that has generated gains on asset sales totaling $300 million over the past three years. The REIT anticipates selling more assets this year.
DLR has increased its dividend for 13 consecutive years, at a 12% annual rate.
Baird analyst David Rogers recently upgraded his rating on Digital Realty from “Neutral” to “Outperform,” writing that DLR will benefit from a surge in Internet-based applications for years to come.
Market value: $177.8 million
Dividend yield: 4.2%
Gladstone Land (LAND, $12.60) owns more than 63,000 acres of farmland across nine states and 19 distinct growing regions. Land is leased to farmers on a triple-net basis, meaning the farmer pays not just rent, but also insurance, maintenance costs and taxes. Lease terms range from one to 15 years, rents escalate at 2%-3% per year and periodic rent resets based on market conditions are built into contracts. Rental rates have been rising approximately 9% per year.
Gladstone invests in farmland for growing fresh produce (fruits and vegetables), which tends to be less price-volatile than commodity crops such as corn and soybeans. Demand for fresh produce has tripled over the past four decades, and price increases have significantly outpaced inflation. A steady national decline in the amount of farm acreage available also is driving up the value of Gladstone’s farmland.
In 2017, the REIT paid $131.6 million to acquire 12,802 acres, primarily in the Southwest. Acquisition opportunities are plentiful as nearly 65% of U.S. farmers are approaching retirement age and looking to monetize their assets. Gladstone offers sale/leaseback arrangements that allow farmers to stay on the land and keep farming until retirement.
Since going public in 2013, the REIT has increased revenues sixfold, grown adjusted FFO per share more than 100% annually and made 62 consecutive monthly dividend payments. Dividends have increased 10 times, coming in small fractional improvements throughout the year.
Five of the six analyst firms that follow Gladstone rate the stock “Strong Buy” or “Buy.”
Market value: $1.0 billion
Dividend yield: 6.7%
Hannon Armstrong (HASI, $19.61) is a sustainable infrastructure REIT that invests in solar, wind and energy efficiency assets, primarily through investments in regulated utilities. Roughly half of its investments are solar assets, with the remainder evenly divided between wind and energy efficiency projects. The REIT has $4.7 billion in assets under management and targets approximately $1 billion in new transactions annually.
Hannon Armstrong partners with Fortune 1000 companies on infrastructure projects and is the largest investor in efficiency projects for the U.S. government, which so happens to be the country’s largest property owner and energy consumer.
Growth drivers include increasing utilization of wind power, which accounts for more new power generation than any other source, and a $30 billion U.S. solar market that is finally becoming cost-competitive with natural gas on large-scale deployments. In addition, Hannon Armstrong envisions major growth opportunities in energy efficiency, which typically involves upgrades to lighting, thermostats and insulation. The REIT estimates that lighting upgrades alone represent $50 billion in potential energy savings for American customers.
In the last four years the REIT has invested in 175 projects and grown its portfolio 30% per year. Yields on projects, which have an average lifespan of 12 years, have consistently exceeded 6%.
The company’s FFO grew by 6% in 2017, and Hannon is guiding for 2%-6% annual EPS growth over the next three years. Meanwhile, the dividend has improved for five consecutive years at a 26% annual rate.
Five of the six analyst firms monitoring Hannon Armstrong have “Strong Buy” ratings on the stock.
Market value: $9.7 billion
Iron Mountain (IRM, $34.12) is an industry leader in data storage, serving roughly 225,000 customers across 53 countries. The REIT stores both physical and electronic records for 95% of the Fortune 1000. Iron Mountain owns 1,400 data storage facilities worldwide, representing more than 85 million square feet of storage space.
Customers need document storage during economic booms and recessions alike, and Iron Mountain is protected by long-term leases with built-in escalation clauses that provide a hedge against inflation. Thanks to thousands of clients and very low customer turnover, the REIT has sizable recurring revenues and the ability to pass cost increases through to customers.
Iron Mountain is expanding its presence in emerging markets and targets $150 million in M&A investment during 2018. This is in addition to the $100 million it spent to acquire Credit Suisse datacenters in London and Singapore, and $185 million for new datacenters in the U.S. that are expected to come online this year.
The REIT’s earnings have improved by 6.4% annually over the past five years, and FFO growth accelerated to 12% last year; Iron Mountain targets 11% annual FFO growth through 2020. The dividend on IRM shares has improved for eight consecutive years, and going forward, the company plans for 4% annual dividend growth while keeping its payout ratio in the mid-70% area.
Evercore ISI Group analyst Sheila McGrath initiated coverage of Iron Mountain last year with a rating of “Outperform.”
Market value: $6.6 billion
Dividend yield: 5.3%
Lamar Advertising (LAMR, $64.69) is one of the largest outdoor advertising companies in the U.S.. The REIT leases space for advertising on billboards, bus shelters, benches, logo signs near highway exits and in airport terminals.
Lamar owns roughly 149,900 billboard displays, 2,800 digital billboards and 53,300 transit displays across North America and Puerto Rico. The REIT also is the largest provider of logo signs near highway exits, operating approximately 145,000 logo signs across North America and providing services under 22 of 24 privatized state contracts for logo signs.
Hurricane Maria hurt the REIT’s Puerto Rico operations and limited 2017 FFO-per-share growth to 1.5%, but Lamar anticipates 2%-5% growth this year as a result of acquisitions and spending on political advertising in advance of the midterm elections. During the last midterm election cycle, political ads contributed $8 million to revenue.
The REIT closed $177.4 million of purchase transactions in 2017 and added more than 300 digital billboards to its portfolio. Lamar plans to add another 150 digital billboards through buildouts this year.
Since converting to REIT status in 2014, Lamar has raised dividends 10% per year, including a 10% increase already approved in 2018.
Market value: $27.6 billion
Weyerhaeuser (WY, $34.96) is the largest private owner of timberland in the U.S. and North America’s leading wood-products producer. The REIT owns 12.4 million acres of prime timberland, 19 lumber mills capable of producing 5.0 billion feet of board per year, 13 mills producing engineered wood products and 18 distribution facilities.
The primary driver of demand for timber products is housing starts, and with nearly 1.3 million U.S. housing starts planned for 2018, Weyerhaeuser is well-positioned to benefit. In addition, supply constraints on Canadian lumber will enable the REIT to increase operating rates and pricing.
WY has grown EPS 7.4% annually over the past five years. In 2017, the REIT improved pre-tax earnings by 30%, generated the highest cash flow from its Wood Products business in 13 years, and captured nearly $140 million in operational cost savings.
Weyerhaeuser also simplified its portfolio by divesting Uruguay operations and selling 100,000 acres, or less than 1% of its land base, for $700 million. This acreage was sold at a 55% premium to the value of its timber.
Since converting to a REIT in 2011, Weyerhaeuser has raised dividends six times and more than doubled its annual payout.