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All Contents © 2019The Kiplinger Washington Editors
By Lisa Springer, Contributing Writer
| December 26, 2018
Real estate investment trusts (REITs) – a way for investors to gain access to assets such as apartments and office buildings while often collecting generous yields – had a disappointing 2018. With just a few days left to go in the year, the Vanguard REIT ETF (VNQ) had lost 13.5% compared to a 12% decline for the broader market. This contrasts with 10-year average annual gains of just more than 12% for the VNQ.
Will REITs bounce back in 2019? Well, the same fear that hampered these real-estate plays in 2018 – rising interest rates – still is on the board for the coming year. And higher rates on bonds sometimes hamper the performance of REITs.
However, these companies are not created equal. The best REITs for 2019 could benefit from other powerful trends in 2019. For instance, cloud computing’s growth should continue to fuel robust demand for data storage services. A massive infrastructure spending bill could improve the fortunes of related REIT plays. And mobile-data growth, as well as the rollout of lightning-fast 5G technology, offers potential growth for cell-tower REITs.
Here are the 13 best REITs to buy and hold in 2019. Not only should they benefit from broad trends that could help them outperform their brethren, but REITs as a whole are trading at much more palatable valuations lately. Moreover, average dividend yields in the space currently exceed 4%; all the more reason for investors to stick with REITs if market rockiness continues in the coming year.
Data is as of Dec. 25, 2018. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price.
Market value: $21.1 billion
Dividend yield: 3.9%
Digital Realty Trust (DLR, $102.41), the world’s largest data-center REIT, is well-positioned to benefit from explosive demand for cloud-based solutions. The REIT owns 198 data centers across 32 metropolitan markets across the globe and serves more than 2,300 corporate customers, including the likes of Verizon (VZ), Comcast (CMCSA) and Oracle (ORCL).
The real-estate play has generated consistent 12% annual growth in core funds from operations (FFO, an important metric of REIT profitability) since 2006, and its dividend has expanded at the same rate. Organic growth is supported by high customer retention rates and 2% to 4% annual rent escalators embedded in leases.
Digital Realty is constructing new campuses and expanding its footprint to take advantage of a next wave of cloud computing forecast to generate 76% annual growth in the artificial-intelligence market, 34% yearly growth in Internet of Things applications and 37% per year growth in the autonomous vehicle segment.
DLR expanded its Latin American footprint last quarter by acquiring Ascenty, Brazil’s largest data-center provider, for $1.8 billion. Through this purchase, the REIT gains 14 new data centers, approximately 140 new customers and an enhanced presence in the world’s eighth-largest economy.
The REIT beat consensus analyst estimates last quarter by delivering 8% year-over-year FFO per share growth. Moreover, it reiterated its guidance for full-year FFO per share for 2018, which should translate to 7%-plus growth.
Guggenheim analyst Robert Gutman recently upgraded his rating on Digital Realty shares from “Neutral” to “Buy.”
Market value: $27.3 billion
Dividend yield: 2.7%
Another large data-center REIT is Equinix (EQIX, $339.02), which owns more than 200 data centers spread across five continents and 52 major markets. Equinix has more than 9,800 customers, including nearly half of all Fortune 500 companies.
Like Digital Realty, this REIT has produced steady organic growth due to high recurring revenues (roughly 94% of total revenues) and 2% to 4% contracted annual rent increases. Equinix has produced 63 consecutive quarters of improving revenues. And in the past decade, annual revenue growth has averaged 26% per year, while cash-flow growth has averaged 29%.
Equinix’s growth plans includes expanding its network of data centers. Development projects typically generate return on investment of about 30%. At present, Equinix has 30 construction projects underway that will expand capacity in 21 major world markets.
The REIT is guiding for 13% FFO per share growth in 2018 and hiked the dividend 14% this year and in 2017. Its conservative payout target of 45% provides cushion for even more dividend growth ahead.
Equinix shares are rated buy or strong buy by 21 of 25 covering analysts. The remaining analysts still call it a hold.
Market value: $5.4 billion
Dividend yield: 3.6%
The last of the data-center REITs we’ll discuss here is CyrusOne (CONE, $51.11), which provides data storage services for approximately 1,000 customers through a network of 47 data centers across the Americas, Europe and Asia.
During the third quarter of 2018, CyrusOne signed 500 new leases with customers – the second-highest quarterly total in its history – and added seven new Fortune 1000 customers, increasing its total to 208. The REIT also added $89 million to its contract backlog – the largest quarterly increase in its history – which increased total backlog to nearly $850 million.
Lease terms averaging 8.7 years provide this REIT with great predictability of revenues. Approximately 81% of CyrusOne’s leases have embedded 2% to 3% annual rent escalators that drive reliable organic growth.
The REIT recently acquired new sites on the West Coast, commenced expansion projects in London and Frankfurt, and established a strategic partnership with a leading Brazilian data-center provider, ODATA Brazil. All of these actions serve to expand the REIT’s footprint across key data-center markets and fuel future growth.
CyrusOne delivered 7% FFO per share growth during in the first nine months of 2018 and has guided for 6% to 8% full-year FFO growth.
The REIT began paying dividends in 2013 and has increased its payout an average of 26% annually over three years, including a 9.5% increase in 2018.
Market value: $25.0 billion
Dividend yield: 5.2%
An aging population fueling health-care costs is one of the most powerful demographic trends shaping America today. The U.S. senior population is expected to double over the next two decades, and health-care REITs such as Welltower (WELL, $66.44) may prosper as a result.
Welltower is America’s largest healthcare REIT and participates in nearly every aspect of medical care, from hospitals and outpatient clinics to assisted living and skilled nursing facilities. The company own 1,517 healthcare properties across the U.S., Canada and the U.K.
Major healthcare providers such as Sunrise Senior Living, ProMedica and Evolution Health lease the REIT’s properties under long-term contracts. Approximately 94% of Welltower’s revenues are private pay, so changes to Medicare/Medicaid pose little risk. In addition, the essential healthcare services provided by its tenants makes this REIT essentially recession-resistant.
In December, Welltower purchased $1 billion of senior housing and medical office properties, on top of $1.5 billion of medical office property deals closed during the third quarter of 2018. The REIT also recently partnered with the Qatar Sovereign Wealth Fund on funding for new projects.
Welltower has consistently outperformed other REITs by returning 14.9% annually since its inception, and increasing dividends every year since 2004. However, the pace isn’t exactly brisk; over the past five years, dividends have increased by 3% annually.
WELL was upgraded by three analyst firms in 2018. The most recent upgrade was by Raymond James analyst Jonathan Hughes. Hughes raised his rating from “Market Perform” to “Outperform,” citing the REIT’s higher margin of safety.
Market value: $20.5 billion
Dividend yield: 5.5%
Another major healthcare REIT benefitting from the graying of America is Ventas (VTR, $57.51). This REIT owns approximately 1,200 senior housing, healthcare and research properties across the U.S., Canada and the U.S. It has delivered an industry-leading 23% annual return over the past 18 years, along with 8% annual dividend growth.
Ventas is more diversified than Welltower; it participates in every healthcare vertical, including senior housing, medical office, university-based research centers, in-patient rehabilitation and long-term acute care centers, hospitals and international hospitals. Skilled nursing, a poorly performing area for most healthcare REITs, represents less than 1% of Ventas’ business.
Like Welltower, Ventas leases its facilities to leading healthcare providers such as HCA Healthcare (HCA), UnitedHealth Group (UNH) and Advocate Health under long-term contracts. Senior housing represents roughly 55% of the portfolio. Leases on these properties average eight years and, like the data-center REITs, have embedded rent escalators for growth.
Ventas is committed to adding more university-based research centers to its portfolio. These assets presently generate 18% annual growth.
The REIT has increased dividends every year over the past decade and grown dividends 4.1% annually over the past five years. On top of that, Ventas offers the health care REIT industry’s most conservative balance sheet. Fixed charge coverage (how well earnings cover fixed charges) is strong at 4.6x, the ratio of debt-to-assets is modest at 36% and near-term debt maturities represent less than 12% of total debt.
Ventas exceeded consensus analyst estimates in the third quarter of 2018 and raised its full-year guidance for FFO per share.
Market value: $43.1 billion
Dividend yield: 4.3%
The rollout of ultra-fast 5G networks is a critical theme driving renewed growth for communication infrastructure REITs such as Crown Castle International CCI, $103.87). Crown Castle is the nation’s largest provider of shared wireless infrastructure. The REIT owns 40,000 cell towers in the U.S. and 60,000 miles of fiber cable for small cell networks.
Leases with the “Big Four” wireless carriers – Verizon, AT&T (T), Sprint (S) and T-Mobile (TMUS) – account for roughly 74% of Crown Castle’s revenues. These leases provide recurring revenues and organic growth from built-in rent escalators. At present, Crown Castle has approximately $24 billion in contracted lease payments booked over the next five years.
An explosion in mobile data has enabled this REIT to generate revenue growth every year since 2001, including during the 2008-09 Recession. Crown Castle achieves incremental sales growth by adding new tenants to existing towers, which also boosts profit margins and ROI.
Crown Castle has increased dividends every year since 2014. In the last three years, dividends have grown 28% annually. The REIT is committed to delivering at least 7% to 8% annual dividend growth going forward.
Market value: $67.7 billion
Dividend yield: 2.2%
American Tower (AMT, $153.58) is a global provider of communications infrastructure that also benefits from 5G rollout. This REIT owns 40,000 cell towers in the U.S. and 128,000 cell towers across Central and South America, Europe, Africa and India. In addition to benefiting from U.S. mobile data growth, American Tower enjoys solid gains internationally markets due to declining smart phone prices worldwide, which is fueling 30% to 40% annual market growth. Moreover, the REIT plans to aggressively expand its footprint in India, where more than 1.5 billion new mobile phone subscribers will be created over the next five years.
Like Crown Castle, American Tower generates strong recurring revenues from five- to 10-year lease terms and 3% embedded rent escalators. Organic growth in tenant billings and new tower installations have enabled this REIT to deliver 16.5% annual revenue growth and 12% yearly profit growth across the past decade.
Effective allocation of capital is indicated by the REIT’s demonstrated ability to add 25,000 new cell towers in recent years while maintaining an investment-grade credit rating and de-leveraging its balance sheet. Five-year dividend growth has averaged 24% annually, and American Tower has also completed nearly $5 billion in share repurchases. The company increases dividends quarterly, too, not annually; the payout has improved by 20% in 2018 across four hikes.
American Tower has buy or strong buy recommendations from 21 of 22 covering analyst firms.
Market value: $8.8 billion
Dividend yield: 8.0%
Iron Mountain (IRM, $30.64) provides physical document storage services that its customers require regardless of economic trends and in every kind of interest-rate environment. The REIT is an industry leader in this unique niche and serves more than 225,000 customers from 1,400 facilities across 54 countries. Its customers include 95% of Fortune 1000 companies.
The REIT’s North American and Western Europe portfolio currently accounts for 81% of revenues, but Iron Mountain expects future growth to come from emerging markets. Organic growth ranges around 3% per year in developed markets and 7% annually in EMs. As a result, the REIT anticipates increasing emerging market exposure in the portfolio will fuel 5% annual growth in organic sales and meaningful margin expansion.
While slightly more leveraged than some other REITs, Iron Mountain benefits from 72% fixed-rate debt and a 4.8% blended interest rate on debt. In addition, the REIT also has plenty of cash (two times EBITDA, a key cash-flow metric) available for dividends and investments.
Iron Mountain targets 6.7% annual growth in sales, 10.9% annual cash flow growth and 4% annual dividend increases over the next three years. The REIT also plans to reduce its leverage to below the REIT average.
This REIT has generated steady dividend growth since 2010 and annual payout increases of 14.5% on average over the past three years. IRM also has paid out four special cash dividends and two stock dividends over the past eight years.
Berenberg analyst Nate Crossett initiated coverage in September with a “Buy” rating and a $52 price target.
Market value: $11.9 billion
Dividend yield: 3.5%
Alexandria Real Estate Equities (ARE, $110.28) is an urban office REIT uniquely focused on life sciences and high-tech facilities located adjacent to major universities and research hospitals. This REIT focuses on Class A properties in research centers such as Boston, San Francisco, New York, San Diego, Seattle, Maryland and Research Triangle Park in North Carolina. Top tenants include healthcare giants such as Illumina (ILMN), Bristol-Myers Squibb (BMY), Takeda (TKPYY) and Sanofi (SNY); leading universities such as MIT, Harvard, Johns Hopkins and Duke; and research agencies of the U.S. government.
Alexandria’s property portfolio encompasses 32.2 million square feet of office space and consists of 21.6 million square feet of operating properties, 2.6 million square feet of development and redevelopment space for deliveries in 2019 and 8.0 million square feet of intermediate-term and future development projects.
The REIT’s 96% occupancy rate, embedded rent escalators and triple-net leases (which require that tenants pay not just for rent, but for maintenance, taxes and insurance) have supported 5% annual same-property growth on average across the past 10 years. Alexandria plans to add 40 to 45 new Class A properties and 9.1 million square feet of new leasable space over the next five years, potentially doubling the REIT’s rental revenues by 2022.
Alexandria has generated 58% FFO per share growth over five years and is guiding for 10% gains in funds from operations this year. Meanwhile, the dividend has improved by 6% to 7% in each of the past three years, and a modest payout ratio of 57% ensures a high margin of safety.
Citigroup analyst Michael Bilerman recently upgraded Alexandria to “Buy,” recommending the company as a blue-chip alternative to premium valuation healthcare REITs that has attractive assets in high-growth markets.
Market value: $3.1 billion
Dividend yield: 3.1%
Newly public Americold Realty Trust (COLD, $24.27) is the largest and only traded REIT focused on temperature-controlled warehouses. The company owns and/or leases 156 warehouses that provide 924 million cubic feet of cold storage space and serve approximately 2,400 customers across North America, Australia, New Zealand and Argentina.
Customers rely on Americold’s strategically located facilities and extensive geographic footprint to optimize their own distribution networks. The REIT’s top 25 customers average 33-year tenures as tenants of the company, lease multiple facilities, purchase additional value-added services and are committed under long-term leases. Tenants include major food producers such as ConAgra (CAG) and Kraft Heinz (KHC), as well as leading food retailers and distributors such as Kroger (KR) and Sysco (SYY).
Americold holds an industry-leading 23% share of the American cold storage market. Its size provides competitive advantages related to economies of scale, reduced operating costs and lower cost of capital and also position the REIT as the lead consolidator in a highly fragmented cold chain market.
Americold has generated 3.3% annual rent growth and 6.0% yearly income growth from its existing franchise. Rising occupancies and rents, expansion at existing sites and acquisitions are likely to fuel future growth. The REIT has $109 million of development projects underway and recently partnered with Woolworths, Australia’s largest grocer, on $600 million of new development projects to be completed over the next three to five years. Americold targets two to three development projects each year. Projects typically require $75 million to $200 million of investment and generate 10% to 15% ROI.
The REIT’s expansion strategy is supported by a strong balance sheet. Debt represents just 23% of enterprise value, there are minimal near-term debt maturities and Americold has $385 million in cash and an untapped $450 million bank credit line.
Americold, which went public in January 2018, has earned “Outperform” ratings from analysts at Raymond James, Zacks and SunTrust Robinson Humphrey.
Market value: $189.1 million
Dividend yield: 4.6%
Gladstone Land (LAND, $11.57) acquires farmland that it rents out to corporate and independent farmers under long-term, triple-net leases. Its farm leases have embedded 2% to 3% annual rent escalators and periodic resets that fuel reliable organic growth. The current portfolio consists of 84 farms encompassing 72,444 acres of land and valued at $610 million. Gladstone owns farms in 10 states, including Arizona, Nebraska and Michigan, that grow fresh fruits and vegetables for the U.S. market.
This REIT is benefitting from consumer preferences that favor increased consumption of fresh produce and organic foods. Demand for fresh fruits and vegetables has grown 362% in the last 30 years, which is 1.7 times faster than growth in the overall Annual Food CPI over the same period.
Rents, income and capitalization rates for farms growing fruits and vegetables have expanded at a much faster rate than farms focused on traditional commodity crops (corn and soybeans), making this an especially attractive farm property niche.
Gladstone has been an aggressive acquirer, purchasing approximately $446 million of new farm assets since its 2013 IPO. Acquisitions have helped drive nearly seven-fold growth in revenues and three-fold growth in FFO per share over five years. Dividends have followed a similar trajectory. Over the past 40 months, Gladstone has increased its dividend 10 times for a total gain of nearly 48%.
Gladstone has many opportunities to expand its farmland portfolio and rental income. Because of the fragmented nature of farm ownership. The total value of American farmland exceeds $2.7 trillion, but 87% of farms are owned by individual families, many of whom are seeking an exit strategy. Nearly two-thirds of America’s farmers are nearing retirement age and have no family members interested in running their existing farm.
The REIT also has minimal exposure to rising rates due to a debt structure that features 100% fixed rates, 3.3% weighted average interest rates and average debt maturities of 8.9 years.
Market value: $1.2 billion
Dividend yield: 6.9%
Rep. Nancy Pelosi, D-Calif., has indicated building America’s infrastructure is a high priority for the new Congress. House Democrats originally called for $1 trillion in new federal spending on infrastructure as part of their “Better Deal” plan for America, which they unveiled in February 2018.
REITs poised to benefit from heightened infrastructure spending include Hannon Armstrong (HASI, $19.11). Hannon funds projects that address climate change. It invests in solar and wind, storm water remediation and energy efficiency assets, and partners with manufacturers, energy service providers and the U.S. government on its projects. Hannon Armstrong estimates there is a $100 trillion worldwide market for energy-efficiency and renewable-energy projects.
Hannon Armstrong boasts a 30-year track record in environmental remediation and $5.3 billion of assets under management, diversified across 175 mostly investment-grade projects. The REIT expects to invest $1 billion annually in new projects.
Reflecting robust growth across virtually all of its environmental remediation markets, Hannon Armstrong delivered 26% revenue growth and 16% EPS gains during the first nine months of 2018. The REIT has minimal exposure to rising interest rates because fixed rates represent 77% of its debt. Hannon Armstrong began paying dividend four years ago and has hiked payout at a 15% annual rate. Low 62% payout provides a margin of safety and ample room for more dividend growth.
Hannon Armstrong is rated buy or strong buy by five of its six covering analysts.
Market value: $390.5 million
Dividend yield: 9.2%
CorEnergy (CORR, $32.68) is a smaller infrastructure player that specializes in assets critical to the operations of oil and gas companies. The REIT’s portfolio consists of the Pinedale Liquids Gathering System, which processes and stores energy condensates and liquids; the Grand Isle Gathering System, a subsea-to-onshore pipeline and storage terminal for oil and water; the MoGas and Omega pipelines, which supply natural gas to utilities; and the Portland Terminal, a storage facility for crude oil and natural gas linked to barge, rail and truck lines. The value of the REIT’s assets exceeds $650 million.
CorEnergy leases its assets to tenants on a triple-net basis with terms averaging 10 to 15 years. Most leases have built-in escalators and participating features that allow the REIT to share in excess tenant profits.
Oil and gas companies are eager to sell non-core infrastructure assets and support the REIT’s active deal pipeline. CorEnergy typically closes one or two asset purchases each year with deals usually valued at $50 million to $250 million. A conservative capital structure, with debt representing just 25% of capitalization, gives CorEnergy flexibility for mergers and acquisitions.
Key 2019 initiatives for CorEnergy include pushing through a FERC rate increase for its McGas Pipeline, utilizing excess cash to reduce leverage and closing one or more acquisitions.
FFO per share has improved by 18% over the past four quarters. That helps fuel a budding dividend that started five years ago and has grown at 9% annually. CorEnergy began paying dividends five years ago and has grown payout 9% annually.
CorEnergy has a consensus analyst rating of buy, and the average analyst share-price target of $40 gives it potential upside of 22%.