The real estate sector has, simply put, been a loser in 2020.
Real estate investment trusts (REITs), which own and operate various types of properties and facilities, are off nearly 11% versus a 6% decline for the S&P 500. But there's a world of difference separating the sector's best REITs and its worst.
Much of the pain in real estate has come courtesy of retail-focused companies, many of which have lost more than 50% of their value as investors correctly surmised that stay-at-home orders would minimize shopping trips and curtail customer spending. Office REITs have experienced outsized struggles, too, as shuttered businesses are unable to pay rents, and as large-scale work-from-home strategies have investors rethinking the future of office space.
Not every REIT sector has been equally affected, however. Some REITs are riding out the pandemic shutdowns relatively unscathed - and some are even benefiting from the recent sea changes.
However, while defensive business models are an important characteristic to have when determining REITs to buy, other qualities should be considered, too. Solid balance sheets are a must. Conservative payouts, which leave room for dividends to be easily covered in the event of a shock, and raised in the future when all is well, are ideal, too.
Here are nine of the best REITs to buy not just for their durable businesses, but also their financial strength and dividend coverage.
Market value: $34.4 billion
2020 total return: -6.6%
Dividend yield: 4.1%
Self-storage REIT Public Storage (PSA, $196.97) has been around for nearly 50 years. This REIT owns approximately 2,500 storage facilities across 38 states representing 170 million square feet of leasable space. In addition to its U.S. sites, Public Storage owns interests in 234 self-storage facilities in Europe via its Shurgard investment and 27.5 million square feet of commercial space via holdings in PS Business Parks.
Self-storage facilities are considered an essential business, so the REIT's sites have continued to operate during the pandemic. This has allowed customers to move in or out, access their property and pay rent.
The REIT beat analyst estimates in the March quarter by delivering 4% growth in core funds from operations (FFO, an important profitability metric for REITs) per share. It also improved same-store occupancy to 92.7%, up 6 basis points year-over-year; a basis point is one one-hundredth of a percentage point. However, it did warn that bad debt losses might rise slightly from historical levels, which have averaged less than 2% of rents.
PSA sticks out among the best REITs to buy now because of its fortress-like balance sheet, which reflects its utilization of preferred stock to finance its operations, rather than loans. Debt is limited to a measly 7% of capitalization. Meanwhile, the dividend accounts for just 74% of its trailing 12-month FFO, which is a low, safe ratio for REITs.
While the dividend has been stuck at its same rate since 2017, Public Storage has paid out a regular cash distribution for more than 30 consecutive years.
Extra Space Storage
Market value: $12.2 billion
2020 total return: -9.8%
Dividend yield: 3.8%
Extra Space Storage (EXR, $94.38) is America's second largest self-storage REIT, owning and/or operating more than 1,800 properties encompassing 135 million square feet of leasable space. Half of its properties are owned by the company; the others consist of properties managed for others (36%) and joint ventures (13%).
Extra Space Storage has a national footprint across 40 states, with California, Florida and the Northeastern U.S. combining to represent 43% of the portfolio.
This REIT has delivered strong performance over the past five years. As of its March investor presentation, the company had generated five-year average growth of 5.7% in same-store revenues and 7.1% in same-store income - rates much higher than its peers.
For the March quarter, Extra Space's FFO per share grew by 7% year-over-year; FFO growth over the past five years has been exceptional, at more than 13% annually. Same-store occupancies declined, but only by 10 basis points, to 91.3%.
The REIT's debt load is manageable at 44% of capitalization, and annual free cash flow provides nearly three times the coverage it needs to make annual interest payments. Meanwhile, EXR's dividend payout, at 72% of FFO, provides a wide margin of safety if rents dip, and has supported average annual dividend hikes of 8.8% over the past five years. That puts Extra Space among the best REITs to buy for payout security and growth.
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Market value: $8.3 billion
2020 total return: +11.5%
Dividend yield: 2.8%
CyrusOne (CONE, $72.21) owns approximately 50 data centers worldwide representing more than 4 million square feet of leasing space.
CyrusOne provides mission-critical IT infrastructure mainly to Fortune 1000 companies, which represent 77% of its rents. An added layer of protection is provided by embedded rent escalations in 76% of its leases and average remaining lease terms of 53 months across the portfolio.
Work-at-home and other IT initiatives are generating significant new demand for data services, and the REIT's bandwidth bookings have doubled year-over-year. Occupancy rates currently average 85% for the domestic portfolio and 91% for the international portfolio, leaving plenty of room for growth.
Thanks to its status as an essential business in most countries, CyrusOne has been able to continue developing new facilities that will expand its geographic footprint by 20% when completed.
CONE delivered an impressive March quarter despite the coronavirus, with normalized FFO per share up 18% year-over-year. This data center REIT signed $60 million of new leases during the quarter and ended March with its highest quarterly backlog ever, representing $610 million of contract value.
The REIT has an investment-grade credit rating and recently reduced its interest rate payments by more than 250 basis points via refinancing. Meanwhile, CyrusOne's dividend payout ratio is exceptionally low at 32%. That not only means the dividend is safe, but that CONE should have ample room to continue improving it at a rapid rate; it has averaged 9.7% annual dividend growth over the past five years.
Digital Realty Trust
Market value: $37.4 billion
2020 total return: +17.3%
Dividend yield: 3.2%
Digital Realty Trust (DLR, $139.32) is another player in the digital infrastructure space.
This REIT owns 267 data centers worldwide, serving more than 4,000 customers and providing roughly 145,000 cross-connects, which are connections between companies and network providers such as Verizon (VZ) and AT&T (T).
Digital Realty has grown adjusted FFO by 9% annually on average over the past five years, fueled in part by acquisitions. For instance, it acquired 54 assets in Europe with its 2019 purchase of Interxion, eight assets and six development projects in Brazil by buying Ascenty in 2018, and 12 assets and six development projects in the U.S. via a 2017 acquisition of DuPont Fabros Technology.
However, Digital Realty Trust also is growing with its existing customers as they deploy more hybrid cloud solutions. The REIT is capitalizing on new high-growth cloud segments such as artificial intelligence, the Internet of Things, autonomous driving and virtual reality.
The REIT has a blue-chip customer base; more than half of its top customers - including Facebook (FB), Oracle (FB) and Comcast (CMCSA) - have investment-grade credit ratings. Its top 20 customers account for 53% of annualized rents.
While core FFO per share declined by 6% in the March quarter, the REIT still is guiding for 2020 FFO per share of $5.90 to $6.10, which would easily cover its $4.48 annual dividend. The dividend, which has grown for 14 consecutive years, has swelled by 5.7% annually over the past five years.
Digital Realty also offers a solid BBB-rated balance sheet and has delivered uninterrupted growth in core FFO per share since 2006.
QTS Realty Trust
Market value: $4.0 billion
2020 total return: +24.5%
Dividend yield: 2.8%
We'll tackle one more data center REIT: QTS Realty Trust (QTS, $66.95).
QTS is a newer digital REIT that owns, operates or manages 24 data centers representing more than 6 million square feet of leasing space and serving approximately 1,200 customers, mostly in North America and Europe. The majority of its customers come from the digital media and IT service industries. Conversely, the REIT's exposure to customers from COVID-19-impacted industries such as retail, hospitality and transportation is less than 10%. That has helped fuel a 24%-plus return that puts it among the best REITs so far in 2020.
QTS Realty Trust grew operating FFO by more than 15% during the March quarter. It also ended the period with record annualized booked revenues, boding well for 2020 performance. The company expects revenues, EBITDA and operating FFO per share will all improve this year. It has averaged nearly 6% operating FFO growth over the past five years.
Development activities should support QTS Realty Trust's future growth. The REIT brought 21 megawatts of power and 60,000 feet of leasable space online during the March quarter. It's also completing projects in Chicago, Atlanta, Richmond and other cities that will be ready for customers later this year.
QTS Realty Trust should be able to fully fund 2020-21 development activities thanks to $342 million recently raised through forward stock sales. Long-term debt is only 45% of capitalization, and the REIT has no significant debt maturities before 2023.
This REIT, which was founded in 2003 and went public in 2013, obviously has a short dividend history. But the payout has nearly doubled since its IPO, and it pays out a modest 70% of FFO as dividends.
Crown Castle International
Market value: $68.0 billion
2020 total return: +15.6%
Dividend yield: 2.9%
Crown Castle International (CCI, $163.06) is a leader in cell towers and shared communications infrastructure for the U.S. market. The REIT owns approximately 40,000 cell towers and 80,000 miles of fiber, which also support 70,000 smaller cell structures used to bolster capacity in data-dense areas.
America's "Big Four" wireless carriers contribute nearly 75% of this REIT's site rental revenues. Crown Castle International also benefits from the safety of $24 billion of recurring revenues from these carriers tied to contracted lease payments over five years. And CCI is among the best REITs to capitalize on America's nationwide 5G rollout, which requires a denser cell tower network to carry the load.
Crown Castle announced marginal growth in adjusted FFO per share for the March quarter. But it still expects 2020 AFFO will improve by 8% year-over-year - better than its five-year average AFFO growth of 6%.
The REIT has an investment-grade balance sheet, no debt maturities in 2020 and $5 billion of available liquidity on credit lines. Its fixed-rate debt carries a low 3.7% interest rate.
Crown Castle aims for 7% to 8% annual dividend growth, and it met that expectation last October with a 7% hike to $1.20 per share quarterly. The REIT's dividend payout ratio is moderate, at 84% of AFFO.
Gladstone Land Corporation
Market value: $317.4 million
2020 total return: +16.7%
Dividend yield: 3.6%
Farming isn't perfectly recession-proof, but it's proving a durable business for Gladstone Land (LAND, $14.87). The REIT owns 113 farms and approximately 88,000 acres of prime farmland across 10 states that it leases out to fruit, nut and vegetable farmers. The value of its portfolio is estimated at $892 million, which is nearly three times the firm's current market value.
The REIT's farmer tenants grow higher-margin specialty crops such as blueberries, figs, and almonds that are sold directly to major grocery chains like Kroger (KR) and Walmart (WMT). During April, all of Gladstone Land's farms were rented out and current on rent payments.
Gladstone's adjusted FFO per share rose 47% during the March quarter; AFFO growth has averaged 4% over the past five years. Meanwhile, the value of its farmland portfolio grew nearly 2%. A solid mix of new farms in its acquisition pipeline and leases renewing at higher rates support Gladstone Land's 2020 growth expectations.
Management and other insiders own an impressive 11% of the company, suggesting a strong focus on maintaining and growing the dividend.
Gladstone Land is among the best REITs to buy for sheer dividend tenacity. LAND has paid 97 consecutive monthly dividends and hiked payments 18 times over 21 quarters. An AFFO payout ratio of 85% provides a safety net and room for additional dividend growth.
Market value: $4.1 billion
2020 total return: -11.8%
Dividend yield: 5.3%
Stag Industrial (STAG, $27.24) is better positioned than most warehouse REITs to handle the fallout from the pandemic due to its high-quality balance sheet, diverse tenant base (420 at present) and well-laddered lease expirations. The REIT's largest tenant, Amazon.com (AMZN), is aggressively scaling up to meet robust e-commerce demand. In addition, more than 60% of Stag Industrial's tenants are very large companies generating over $1 billion of annual sales each.
Stag Industrial owns 456 warehouses, representing nearly 92 million square feet of leasable space across 38 states. The portfolio occupancy rate is 96.2.
The REIT's core FFO per share increased by 4.4% year-over-year during the March quarter. Cash available for distribution improved 14% to $56 million. This provided more than threefold coverage of the March-quarter dividend. Occupancy rates increased, and FFO benefitted from a 2.5% rise in rents from embedded lease rent escalations. Only 28 of the REIT's 519 leases expire this year, suggesting occupancy rates should remain high.
Stag Industrial's net debt totals only 46% of capitalization and 4.4 times EBITDA. In addition, this REIT has nearly $325 million of cash on hand, which is more than enough to cover 2020 dividends (if it came to that) and debt maturities. But Stag Industrial, a monthly dividend stock, is guiding for 2020 core FFO between $1.80 and $1.88 per share, well in excess of the $1.144 per share it will need to cover its payouts.
That dividend has grown for eight consecutive years, albeit at a glacial pace of 1.3% annually.
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Market value: $1.2 billion
2020 total return: -10.4%
Dividend yield: 5.1%
Getty Realty (GTY, $28.97) is a net-lease REIT that owns convenience stores and gas stations. At present, the company owns or leases 947 properties across 35 states, primarily in urban markets. Its stations are leased to nationally known fuel brands including BP, Shell, Mobil and more.
Approximately 10% of its sites also have quick-serve restaurants for prominent brands including McDonald's (MCD) Subway, Wendy's (WEN) and Dunkin Donuts (DNKN). Nearly all of its tenants have remained open during the pandemic, and as of early May, Getty Realty had so far collected 97% of April rents.
As a net-lease REIT, Getty's tenants are responsible for paying taxes, property maintenance and repair costs and insurance. The company's average lease term is 10 years, and all leases have built-in annual rent escalators.
The REIT's adjusted FFO per share grew nearly 10% in the March quarter, fueled by rent increases, acquisitions and effective cost management. Adjusted FFO growth over five years has exceeded 6%.
Getty's balance sheet is strong based on a stable BBB credit rating from Fitch and a debt-to-capitalization ratio of 47%. The REIT also has $215 million of unused capacity available on its credit line. Dividend coverage is solid, too, at 82% of AFFO. That has given GTY room to grow its payout by 11% annually over the past five years.
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