The stock market’s impressive run over the last few years placed high-flying growth stocks, often from the technology sector, front and center. However, the late 2018 downturn helped remind some investors about the need to diversify and add income to their portfolios, which means now might be time for investors to look at real estate investment trusts or REITs.
REITs are companies that own, operate, or finance real estate properties that produce income, such as apartment complexes or retail locations. These companies are heavily regulated and must meet a number of qualifications to be classified as a REIT, but they do offer investors a few distinct advantages.
First, real estate can be a very profitable investment sector when certain economic conditions are present. What’s more, REITs must pay at least 90% of their taxable income in dividends to shareholders, so they are a great option for income investors looking for steady payouts.
The presence of mortgage debt makes this a rate-sensitive industry. But many companies offset this through strong funds from operations (FFO) growth, or they stick out from the pack with large amounts of their debt already fixed at a low rate.
Luckily our proven Zacks Rank, which emphasizes earnings estimates and estimate revisions, works with REITs just as does with any other company. We prefer to use FFO as the metric of profitability here, but the trends work the same otherwise.
The strongest REITs are going to be those with improving outlooks and great Zacks Ranks. So, let’s check out the REITs that our model says are impressive options right now:
1. Ready Capital Corporation RC
Ready Capital currently sports a Zacks Rank #1 (Strong Buy), along with “B” grades for Value and Momentum in our Style Scores system. The company is a non-bank real estate and small business lender for multifamily and commercial real estate. The publicly traded mortgage REIT, which is externally managed by Waterfall Asset Management, LLC, is projected to see its quarterly FFO surge over 16% and its full-year FFO soar roughly 30%, based on our current Zacks Consensus Estimate.
Meanwhile, the company’s quarterly revenues are projected to pop 11.3%. Plus, RC trades with a P/E of just 8.9, which marks a discount to its industry’s average of 9.4. The company declared a dividend of $0.40 a share in December 2018 and boasts a dividend yield of 10%. Ready Capital stock opened at $15.83 a share Tuesday and has experienced positive momentum to start the year.
2. Exantas Capital Corp. XAN
Exantas Capital is a REIT that provides commercial real estate loans and credit investments such as commercial mortgage-backed securities. XAN currently carries a Zacks Rank #2 (buy) and has “B” grades for both Value and Growth. The company’s quarterly FFO is expected to skyrocket over 264% from the year-ago period, on the back of 33% revenue growth.
On top of that, its full-year FFO figure is projected to expand by 190%, with the following fiscal year’s figure projected to come in 45.7% above our 2018 estimate. The New York-based company also boasts a dividend yield of 6.5%. XAN is also trading under $11 a share and has seen its stock price surge to start 2019.
3. Chatham Lodging Trust CLD
Chatham Lodging is a self-advised hotel REIT that focuses on upscale extended-stay and select-service hotels. The company’s portfolio includes notable brands such as Courtyard, Hampton, Hilton Garden Inn, and many more. These facilities are primarily near large metropolitan markets in the U.S., so Chatham is definitely in some prime lodging real estate.
CLD holds a #2 (Buy) rating. Its consensus estimates for FFO the next quarter, as well as the current and next full fiscal years, have all moved higher over the last 90 days. CLD also trades with a P/E of just 10.9, which is a steep discount to its industry’s average of 15.1. The stock presents a dividend yield of 6.2%, and the company has consistently delivered this payout for years.
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