REITs that may withstand rate hikes.
One thing about 2018: It's been the year of the rate hike. The Federal Reserve has raised the federal funds rate -- the benchmark rate at which banks lend to one another -- three times. With the rate forecast calling for at least one more rate increase in 2019, investors should consider the effect on their portfolios. Real estate investment trusts, known as REITs, can offer stability in uneven markets when rate hikes occur gradually. If rising rates are a hallmark of a strong economy, that may signal lower vacancy rates, rising rents and in turn, increased profits. With that in mind, here are eight of the top REITs to buy in 2019.
Prologis (ticker: PLD)
As an equity REIT in the industrial sector, Prologis has the potential to benefit from secular tailwinds in the market, says Scott Crowe, chief investment strategist at CenterSquare Investment Management in Philadelphia. The REIT's focus is leasing distribution facilities to business-to-business and e-commerce customers. Crowe says a recession could see a decline in price, but it could still outperform equities in 2019. A yield of 2.8 percent makes PLD enticing to investors seeking a passive income.
Equity Residential (EQR)
"Investors should consider companies with more cyclical sensitivity, as well as companies with attractive development pipelines," says Wilson Magee, director of global real estate and infrastructure securities at Franklin Templeton Investments. Equity Residential, an S&P 500 company with holdings concentrated in apartment rentals in affluent urban and high-density suburban markets, fits that profile. Magee says Equity's rental revenues could grow more quickly in a rising-rate environment characterized by a strong economy.
Blackstone Mortgage Trust (BXMT)
Conventional wisdom says to avoid mortgage REITs when rates climb, as prices may be negatively affected. Patrick B. Healey, founder and president of Caliber Financial Partners in Jersey City, New Jersey, says commercial mortgage REITs remain a solid investment in a rising-rate climate. "This type of investment is a largely yield-based asset class with significant dividend yields," Healey says. "Since the underlying loans they make are mostly floating rate in nature, as interest rates increase in the market, so do the loan payments from borrowing companies and in turn, the dividends paid to investors." Blackstone, which originates senior loans for commercial properties in North America and Europe, bears this out with a 7 percent yield.
Hospitality Properties Trust (HPT)
When a strong economy is bolstered by higher consumer discretionary spending, the hospitality and lodging industries can reap direct benefits. The key to hospitality REITs' success in a rising-rate environment is a conservative capital structure, says Jiakai Chen, assistant professor finance at the Shidler College of Business at the University of Hawaii-Manoa. "REITs have been exceedingly conservative in the post-recession period," Chen says. "The weighted average leverage ratio of all listed U.S. equity REITs is currently at a two-decade low." Hospitality Properties Trust, which owns hotels and travel properties across the U.S., Canada and Puerto Rico, boasts a conservative profile with a capacity to expand. HPT enjoys a very healthy dividend yield of 7.8 percent.
Vanguard Real Estate ETF (VNQ)
REIT exchange-traded funds can offer respectable yields along with lower costs as well as diversification. Jay Srivatsa, CEO and founder of Future Wealth in Los Gatos, California recommends VNQ. This ETF's objective is providing investors with both income and moderate long-term capital appreciation. VNQ tracks the performance of the MSCI U.S. Investable Market Real Estate 2550 Index, which encompasses small-, mid- and large-cap segments of the equity REIT market. "With a 4.2 percent dividend yield and a contrarian stance to the stock market, this ETF should do well if the market tumbles," Srivatsa says. But if the market remains strong in 2019, REIT returns may underperform compared to the S&P 500 index, he says.
Along with the industrial and manufactured housing sectors, health care performed well in 2018. "The performance of these property types can be attributed to general real estate trends that outweigh the effects of interest rate hikes," says Tore Steen, CEO of online commercial real estate investment marketplace CrowdStreet. Looking ahead to 2019, HCP could prove to be a good buy with its healthy 5 percent yield and prospects for long-term growth. This REIT has been focused on restructuring its portfolio holdings to diversify and improve performance, while simultaneously reducing debt; this could allow it to withstand any negative impacts associated with rate hikes.
NuShares Short-Term REIT ETF (NURE)
Despite the broader REIT market generally underperforming during periods of rising interest rates, there are certain REIT types that can outperform in these environments, says Jordan Farris, head of ETF product development at Nuveen. This includes REITs that own properties with short-term lease structures, such as the NuShares Short-Term REIT ETF. "Given their unique attributes, these types of REITs adjust pricing more frequently in response to changing economic conditions," Farris says. "If the Fed continues to raise rates in 2019, even at a slower pace, NURE can offer investors superior exposure to the REIT market."
Boston Properties (BXP)
The office REIT sector may be one to watch in 2019 as technology expands its footprint. "There are some major innovations in the office sector as building owners find new ways to leverage tech and capitalize on their space, for example, through shorter-term rentals," says Jacob Fingert, a partner at Camber Creek. Boston Properties is one of the largest owners and developers of Class A office properties with concentrations in five major U.S. markets. BXP is set to complete much of its development pipeline over the next few years, Magee says. Its 2.9 percent yield is lower compared with some of the other top REIT stocks for 2019, but its current return trajectory is promising.
Editor's note: Mort Zuckerman, chairman of the executive committee and editor-in-chief of U.S. News, is co-founder, chairman emeritus and former CEO of Boston Properties.
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