Stay Above the Crowd with REITs
November 14, 2018
Stock markets that recently suffered a downturn provide a good laboratory to find segments and particular companies that can power through with not just better performance, but positive returns.
The S&P 500’s Red October sent the index down heavily, with the turbulence continuing into November, resulting in a loss in price of 7.38% since the beginning of October. Meanwhile, the market for real estate investment trusts (REITs) have generated a positive return of 0.96%, as measured by the Bloomberg REIT Index. And since the low on October 12, the REIT index has followed through with a return of 6.14%.
Bloomberg REIT Index (White) against S&P 500 (Orange)
REITs have a lot going for them. First, they are largely outside of many of the conflicts impacting the general stock market.
They are viewed as value propositions and not high growth stocks—in other words, they’re not dependent on ever-greater earnings growth to keep prices up. So, while many of the heavily weighted growth stocks in the S&P 500, including technology market stocks, aren’t content with compiled expectations for earnings expanding into 2019, for REITs there are more managed expectations.
Not only that, but US REITs are largely outside of the continuing trade negotiation concerns in the general stock market. And further, REITs are continuing to benefit from the underlying US economic expansion, with many REIT segments seeing good demand for their properties, fueling good and rising lease contracts.
There are some particular REITs that have been proving to be good defensive stocks in the recent market conditions.
I’ll start with one of my long-term favorites, WP Carey (WPC). WP Carey is a REIT focused on multi-sector properties spanning commercial, offices, education and other segments. The stock is up 5.27% since October 12, and there is good reason for that. The company acquires properties from major corporations, institutions and governments and leases them back on a triple-net basis. This means that the tenants pay for insurance, taxes and basic maintenance, which controls costs for the company.
Funds from operations (FFO), which measure the cash earned from its core property holdings, is generating a return of 16.51%, which continues to climb quarter after quarter from mid-2017 to the most recent quarter. This, in turn, is delivering a nice return on its shareholder’s equity at 9.30%.
The stock pays a dividend currently at $1.025 per share that has been raised every quarter since June 2001, with the five-year annual average payout climbing by 5.06% for a current yield of 6.16%.
And with a price to book at 2.33 times, it remains a good buy for rising dividends from a well-run collection of properties.
Another dependable market for REITs to play in is student housing for college campuses. American Campus Communities (ACC) owns and operates off-campus and some on-campus dorms and related facilities at more than 90 schools in North America. The shares have gained 5.26% since the October low.
Major universities continue to enroll students at a reliable pace. ACC’s funds from operations is generating a return of 9.1% from its properties, which is healthy. The return on equity is a little low, at 3.11%,but the dividends are good, with a current distribution of 46 cents, which has been rising over the past five years at an average annual rate of 5.13%.
The stock is cheaper than most in its segment, with a price-to-book ratio sitting at 1.61 times. The market for student housing REITs has been going through a consolidation, with a collection of mergers as well as privately held acquisitions on the books. American Campus Communities would make for a good overall buyout, which provides some further upside for investors.
Another reliable REIT market is found in the healthcare space. While hospital properties can be fraught with risks, the better bet is in the doctor office and outpatient treatment center space. This is where Healthcare Trust of America (HTA) focuses its property holdings. Healthcare Trust has turned in a return of 5.64% since the recent low in October.
The office and treatment centers are more flexible properties, providing Healthcare Trust with a more defensive collection of properties if local market conditions change. But it has been successful with its core tenants, as the funds from operations return is good, at 10.30%. With lower operating expenses, the overall return on shareholder’s equity is also good, at 7.40%.
The dividend is currently at 31 cents and has been climbing by a modest rate of 1.27% on average over the past five years, for a current yield of 4.70%.
And the stock is also cheap, at a mere 1.63 times its book value, making for a good buy for dividend income and growth over time.
Technology stocks have been a challenge in the recent market turbulence. But one reliable sector that combines technology with real estate has been the data center REITs. Data centers are at the core of cloud computing with all of the major cloud operators and service providers leasing out space in data centers around the nation.
One of my favorites is Digital Realty Trust (DLR), which has turned in a gain since the recent bottom in October of 3.92%. The stock slipped in September on the company’s secondary issuance of shares to fund further property expansion, but has since recovered. At the current market price, the REIT is discounted in its price to book from near 2.90 times in September to 2.63 times.
It pays a current dividend of $1.01 a share (which is up by 7.90% over the past year) for a yield of 3.62%. And projections are for a further raise in the distribution to be declared in February, boosting the distribution to $1.07 a share.
With cloud computing remaining one of the higher-growth parts of the technology market and feeding demand for data centers, Digital Realty makes for a good growth REIT with a nice dividend along the way.