Real estate investment trusts (REITs) - companies that invest in a variety of properties, from office buildings to apartments and self-storage buildings - built big gains in 2019.
A prominent REIT gauge, the FTSE Nareit All Equity REIT Index, gained 25.4% through Nov. 21 (including dividends), with many of the best REITs doing far better. In contrast, the small-cap Russell 2000 Index (used for comparison because the majority of REITs are smaller companies) has gained 18.9%.
Of course, people don't ordinarily invest in REITs to beat the stock market averages. They invest in them for income. By law, REITs must pay out at least 90% of their net earnings as dividends. The average REIT in the FTSE index delivers a dividend yield of 3.6%, compared with 1.8% for both the bellwether 10-year Treasury note and the S&P 500. When the yield of bonds and stocks are so low, REITs become extremely popular.
Real estate also provides diversification. While REITs are still stocks, they don't always move in the same direction as the broad market. And their above-average dividend yields are a nice shelter in a downturn.
While you can invest in a real estate fund, such as the Vanguard Real Estate ETF (VNQ), there are plenty of good individual REITs to buy, many of which offer high yields and reasonable valuations, despite the sector's towering heights this year. "REITs are not a homogenous group," says Chris Kuiper, equity analyst at CFRA Research. In just the past year, REITs have a performance difference of 160 percentage points.
Which ones have the top prospects for the future? Read on as we examine the 10 best REITs to buy for 2020.
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Market value: $2.8 billion
Dividend yield: 5.6%
5-year annual dividend growth: 5.2%
12-month total return: 32.1%
In a sector that's been soaring, it's difficult to find a bargain - but SITE Centers (SITC, $14.27) might be one.
SITE Centers is a shopping-center REIT, and that might make you nervous if you've noticed nearby shopping malls with vast empty parking lots. But SITE centers own and manage open-air shopping centers, often anchored with a grocery store. Grocery stores aren't being terribly threatened by the trend toward online shopping (at least at the moment). Yes, Amazon.com (AMZN) is working toward grocery delivery, but so are the large grocery chains.
SITE is among the best REITs for 2020 thanks to several factors. For one: "SITE Centers has a new management team that's taking advantage of a favorable credit market," Kuiper says. "They have a three- to five-year turnaround plan, and they are executing well on it." The company should see 4.2% revenue growth next year, compared to a 39% decline in 2019. It might not be much, but Wall Street loves a turnaround.
Moreover, the 5%-plus yield is appealing, and Morningstar rates it as one of the few undervalued REITs around.
Market value: $21.1 billion
Dividend yield: 2.8%
5-year annual dividend growth: 7.9%
12-month total return: 12.2%
Boston Properties (BXP, $136.75) is arguably the king of office space: It owns prime properties in New York City, Boston, Washington D.C., San Francisco and Los Angeles. It owns 51.9 million square feet and 196 properties, including the Times Square Tower in New York City and the Prudential Center in Boston. It also has 13 other properties under construction, according to S&P Capital IQ.
Office space is economically sensitive, and as the economy has slowed, so have office REITs, which have lagged the average real estate investment trust over the past 12 months. Indeed, BXP shares have delivered a total return of less than half the FTSE Nareit All Equity REIT Index in that time.
BXP is one of the best REITs to buy in a difficult segment of real estate. Boston Properties' high-quality holdings are a good place if you're hoping the economy will rev up again - or if you simply want a stake in the nation's hottest office markets. The rapidly growing dividend is a nice draw, too.
Market value: $12.8 billion
Dividend yield: 2.7%
5-year annual dividend growth: 6.7%
12-month total return: 26.4%
We move from office space to industrial properties with Duke Realty (DRE, $34.77).
The industrial space, in REIT terms, isn't factories. Instead, they're distribution centers and logistics facilities that have gone well beyond mere warehouses. These properties are geared toward getting goods to consumers, rather than bulk shipments to stores. Those buildings need complex logistical systems to load trucks, as well as accept and process returns. Furthermore, they often need to be near transportation hubs, such as airports and rail terminals, where land is expensive.
In other words, these companies are the best REITs to buy if you want to leverage the growth of e-commerce.
Duke Realty boasts more than 500 facilities sprawled across 155 million square feet in 20 major American logistics markets. And indeed, the company's clear tether to the growth of e-commerce has powered a 120% total return over the past five years.
Admittedly, rising prices have tamped down the yield. Morningstar equity analyst Yousuf Hafuda puts DRE's fair value price at $32 per share; it's trading a bit above that now. But while Duke might not be a screaming bargain, it's not horribly overpriced, either.
For yield-hungry investors, Duke is a nice play on e-tailing in 2020.
Market value: $17.0 billion
Dividend yield: 4.3%
5-year annual dividend growth: N/A
12-month total return: 24.5%
If you've stepped foot inside a hospital recently, you know that health-care costs are rising. And if you're a member of the baby boomer generation - those born between 1946 and 1964 - you're probably using a lot more health care than you used to. Healthpeak Properties (PEAK, $34.34) largely focuses on senior housing, medical offices and life-science buildings in San Francisco, Boston and San Diego.
The company's 4.3% dividend is generous but hasn't increased since 2016, when its spinoff of Quality Care Properties prompted a dividend reduction. There was nothing wrong with Healthpeak - it just needed to account for the smaller company size.
Healthpeak hasn't been averse to dividend increases in the past, however. And the company has largely simplified its portfolio to a more diverse health-care mix.
Mid-America Apartment Communities
Market value: $15.4 billion
Dividend yield: 2.8%
5-year annual dividend growth: 5.7%
12-month total return: 38.5%
Talk to anyone younger than 40, and they'll tell you how expensive housing is. Despite low mortgage rates, homebuyers have to pony up $27,510 for a 10% down payment for the median-priced home, currently $275,100.
Not surprisingly, many families are choosing to rent, rather than buy.
Mid-America Apartment Communities (MAA, $135.38) caters to sun lovers. Its 305 apartment communities are primarily spread across the Mid-Atlantic, Southeast and Southwest, with large concentrations in Florida, Texas and North Carolina. The company also operates some furnished corporate apartments as well.
The dividend yield is relatively low, but not for lack of effort. While MAA has a solid record of boosting its payout, its big run-up over the past 12 months has put a lid on the yield.
The stock, while pricey, is a great play on housing trends. Long-term investors will find Mid-America one of the best REITs to buy in 2020 (and beyond) to cash in on expensive housing.
Market value: $24.9 billion
Dividend yield: 3.6%
5-year annual dividend growth: 4.4%
12-month total return: 25.0%
Realty Income (O, $76.50) The company owns nearly 6,000 properties, which it leases to customers such as Walgreens (WBA), 7-Eleven and FedEx (FDX). Its properties are 98.3% leased, most of those under "triple-net" agreements. That means rent is net of insurance, maintenance and taxes, which tenants are responsible for. That knocks out a lot of variables for Realty Income, which makes its income much more predictable.
Realty Income, which typically sits atop most "best REITs" lists, also is one of Kiplinger's 15 favorite income stock picks.
It has built its reputation on its monthly dividend to the point where it calls itself "The Monthly Dividend Company." Moreover, it's a longtime payer that has delivered 592 consecutive monthly dividends, including 88 consecutive quarterly increases.
If you're looking for a portfolio of high-quality properties and a dividend yield twice that of the 10-year Treasury note, Realty Income is a good bet.
Market value: $14.4 billion
Dividend yield: 4.9%
5-year annual dividend growth: 2.0%
12-month total return: 29.6%
W.P. Carey (WPC, $83.86) is like Realty Income in that it deals in primarily triple-net, single-tenant leases. But it's much more diversified, in several ways.
For one, it owns several property types - not just retail (17.1%), but industrial (23.6%), warehouse (20.4%), office (24.5%) and a smattering of other facilities. Also, while Realty Income has only recently started expanding internationally, just more than a third of annualized based rent is derived overseas (primarily in Europe).
WPC says 99% of their leases have contractual rent increases, and 62% are tied to the consumer price index (CPI), the government's main measure of inflation.
W.P. Carey is another favorite of income investors, not only because of its inflation-minded portfolio, but because it often increases its dividend quarterly rather than annually, albeit by a small amount. In the third quarter, for example, WPC bumped up its regular dole from $1.034 per share to $1.036 - a 0.2% uptick.
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Market value: $8.6 billion
Dividend yield: 2.4%
5-year annual dividend growth: 6.7%
12-month total return: 23.0%
Kilroy Realty (KRC, $80.99) looks for high-quality office buildings, but only on the West Coast.
Kilroy caters to the West Coast technology industry, which has certainly worked out well for it: Occupancy in its properties was 94% in the third quarter, up from 93% a year earlier. Its current focus is San Diego.
As a technology landlord, Kilroy Realty might be the tamest tech bet ever. Given the tech industry's cyclical nature - and grumbling about the high cost of living in places like San Francisco and Los Angeles - a downturn in the volatile industry could put a ding in the stock.
But if nothing changes, KRC looks like one of the best REITs to buy for 2020. It has a sturdy record of boosting dividends at a healthy clip, and it's still enjoying a nice tailwind from tech.
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Market value: $33.9 billion
Dividend yield: 4.2%
5-year annual dividend growth: 1.8%
12-month total return: 26.2%
Welltower (WELL, $83.50) is another bet on the Boomers not being OK.
This health-care REIT concentrates on high-quality senior housing, skilled nursing facilities, and outpatient medical properties in lower-cost areas. Sunrise Senior Living accounts for about 15% of Welltower's net operating income (NOI, which is property revenues minus operating expenses).
Welltower is expecting funds from operations (FFO, an important REIT profitability metric) to come in at $4.14 to $4.18 per share - the midpoint would represent a 3% improvement over last year. Welltower isn't somewhere to look for breakneck growth, but the aging of the Boomers should prop up its results for years.
WELL takes a cautious approach on raising dividends, with a somewhat stingy 1.8% average annual dividend hike each year. Nevertheless, its dividend rate is comfortably above inflation and more than double what the stock market offers.
Market value: $57.4 billion
Dividend yield: 2.3%
5-year annual dividend growth: 9.9%
12-month total return: 39.6%
Industrial REIT Prologis (PLD, $90.85), like Duke Realty, is in the industrial property space, but on a larger scale. The $57 billion REIT leases space to top retailers in the U.S., Japan and Europe. Customers include Amazon.com (AMZN), BMW and logistics company Nippon Express.
Prologis will be even bigger in 2020. In October 2019, it announced it would acquire Liberty Property Trust (LPT), a competitor with a similar property portfolio, for $12.6 billion.
The company has averaged nearly 10% dividend growth over the past five years, but a soaring stock has pushed its yield down - a good problem to have.
There's always a risk when buying a highflying stock, as it can be vulnerable to above-average volatility. Another risk is that companies will build more logistics centers of their own; however, key properties need to be close to urban centers, where land is at a premium, which should discourage this trend.
Copyright 2019 The Kiplinger Washington Editors