Top REITs For Growth And Income

Rising rates have hit the real estate investment trust sector particularly hard over the past year. Several leading advisors and contributors to, however, have taken a contrary view on the REIT space and see long-term value for investors seeking both growth and income.

Jimmy Mengel, The Profit Sector

Farmland prices have been going ballistic over the past few years. But buying and maintaining your own farm as an investment is completely out of reach for most of us. That’s why 30% of all farmland in the U.S. is owned by landlords who don’t farm themselves.

With a farmland, it’s as simple as buying stock to gain exposure and safety to the farmland market. Buying into a REIT is much like becoming a landlord. Farmland REITs are rather simple. In one case, the company will acquire the land necessary for farming and lease it to the farmer in a long-term lease.

Farmland Partners (FPI) is a lesser-known REIT that owns nearly 200,000 acres of farmland that it leases to over 100 tenants that grow 26 different crops in 18 states. It collects rent from these projects and earns management fees for 25,000 acres for other farmers.

Over the last three years, Farmland Partners has provided a nearly 32% annualized return. That’s over three times the S&P 500 during that same period and is around four times more than today’s inflation rate. That’s a 110% total return, which doesn’t include the dividend, hovering near a 2% yield.

FPI is a great way to diversify your dividend portfolio with a sector that is known for being resilient against inflation, market dips, and even recessions. Just this month, the world hit a record population of 8 billion. You’d be wise to gain exposure from this very underrated sector.

Marty Fridson, Fridson-Forbes Income Securities Investor

Highwoods Properties (HIW) is an office property REIT that owns, develops, and leases properties in the upscale business districts of Atlanta, Charlotte, Raleigh, Nashville, Richmond, Orlando, Tampa, and Pittsburgh. The company entered the Dallas market in July 2022.

HIW owns and/or manages almost 27 million square feet of property space with more than 1500 customers. Although the company remains growth-oriented, it has maintained a solid balance sheet with ample financial flexibility. More than 60% of the REIT’s net operating income is derived from Raleigh (24%), Nashville (22%), and Atlanta (16%).

The REIT’s solid balance sheet is evidenced by secured debt accounting for only 7.3% of gross assets. HIW reported 3Q 2022 funds from operations (FFO) of $111.6 million or $1.04 per share, up 8.6% from a year ago. FFO topped analysts’ $0.96 estimates, while total revenue of $207.0 million was slightly better than expectations and up 5.9% year-over-year.

This REIT common stock investment is suitable for low- to medium-risk tax-deferred portfolios. Dividends are taxed as ordinary income and have remained stable with steady growth. Buy at $39.00 or lower for a 5.13% annualized yield.

John Buckingham, The Prudent Speculator

Physicians Realty (DOC) is a small-cap health care REIT that acquires, owns and manages properties leased to physicians, hospitals, health care delivery systems and other health care providers. Its properties are typically on a campus with a hospital or strategically located and affiliated with a hospital or physician organization.

The pandemic undoubtedly impacted tenants, but trends remain in the REIT’s favor as the population ages, health providers are consolidating, and the delivery of care is transitioning to the outpatient venue, while nearly 75% of new medical office building construction is off hospital campuses.

And, management says rising construction costs have allowed the company to capture leasing spreads beyond the historical 2% to 3% range without sacrificing quality.

Indeed, 256,000 square feet of DOC’s portfolio was recently renewed at an aggregate re-leasing spread of 8.0%, the highest quarterly mark in the company’s history. Rising rates have impact- ed the share performance of most REITs in 2022, but the 19% slide year-to-date affords a favorable entry point. The dividend yield is a robust 6.2%.

Tim Plaehn, The Dividend Hunter

Starwood Property Trust (STWD) has been one of our portfolio stocks since our very first June 2014 issue; over the years, it has become our largest position. The company has been a tremendously stable dividend payer, and it has been an outstanding stock to add shares during stock market corrections.

A finance REIT whose primary business is the origination of commercial property mortgages, Starwood is one of the largest players in the field, focused on making large loans with specialized terms. The scale gives the company a competitive advantage over banks and smaller commercial finance REITs.

In recent years, Starwood has acquired what is now the largest commercial mortgage servicing firm. Over the last few years, it has also acquired select real estate properties, including apartments, regular office buildings, and medical office campuses. Starwood also has invested in residential mortgage and infrastructure lending.

I view the Starwood dividend as one of the most secure in the high-yield stock space. Starwood Capital, a real estate-focused private equity company with over $60 billion of assets under management, manages the REIT.

Starwood Capital is a 2,200 person global organization, and Starwood Property Trust taps into that reach and expertise to find high-value commercial mortgage prospects and other investments.

Billionaire Barry Sternlicht, as CEO of both Starwood Capital and Starwood Property Trust, has often repeated his commitment to building STWD to sustain its dividend. Sternlicht and the upper management team own more than $100 million worth of STWD shares.

Historically, STWD has been priced to yield between 7.5% and 8.5%. An 8% yield equates to a $24.00 share price. Accumulating shares for less than $20 makes an attractive long-term investment.

Over the last almost-seven years, I have been buying STWD during market corrections and share price pullbacks. My average cost is under $17.00 per share. In addition to our model portfolio, I have a personal long position in the REIT.

I hope you think of STWD as a long-term investment — one with which you will be able to take advantage of opportunities to average down your cost and increase your dividend income stream.

Prakash Kolli, Dividend Power

The bear market has created some deals. Stocks overvalued for years are now undervalued. Moreover, dividend yields have risen to the highest in a decade for some stocks. One undervalued stock with a 4%+ yield is Realty IncomeO
(O), a real estate investment trust (REIT) that operates under a single-tenant, triple-net lease structure.

The company develops or purchases commercial real estate and rents to retail chains. Under the net lease agreement, the lease is responsible for the monthly base rent and real estate taxes, property insurance, and maintenance. The average lease duration is about nine years and includes rent escalators. Total revenue was $2,788 million in the trailing twelve months. The current CEO is Sumit Roy.

The REIT is one of the five largest global REITs with properties in the U.S., U.K., and Spain. The company owns about 11,427 commercial properties and leases to ~1,125 clients. Realty Income’s occupancy rate median is 98.2%, much higher than its peers.

The top 10 clients are WalgreensWBA
, Dollar GeneralDG
, 7-Eleven, Dollar TreeDLTR
/Family Dollar, FedExFDX
, LA Fitness, Sainsbury, BJ’s, B&Q, and CVS Pharmacy. Also, the REIT has geographic diversification, with Texas, the U.K., California, Illinois, Florida, Ohio, and Georgia making up 44.8% of the rent base.

Realty Income is infamous as one of the monthly dividend stocks. The firm is also a Dividend Aristocrat with 29 years of consecutive increases. The forward dividend yield is 5.19% above the 5-year average of 4.35%. The REIT has one of the most robust balance sheets compared to its peers at an A3/A- upper-medium investment grade credit rating. Realty Income is undervalued, trading at a price-to-AFFO ratio of approximately 14.7X. This value is below its historical 10-year range.

Ben Reynolds, Top Ten REITs

National Storage Affiliates Trust (NSA) is a self-managed REIT, which was founded in 2013 and specializes in the operation and acquisition of self-storage properties within the top 100 metropolitan areas in the U.S. and Puerto Rico.

The trust owns 915 consolidated self- storage properties in 39 states and Puerto Rico, with 58.1 million square feet. It also manages an additional portfolio of 185 properties owned by its joint ventures. NSA owns a 25% stake in each of its joint ventures.

In the third quarter, NSA grew its revenues 37% over the prior year’s quarter thanks to strong growth in rental rates and a boost from acquisitions. Same-store revenues grew 10.7% thanks to a 13.6% increase in average rental revenue per occupied square foot, partly offset by a decrease in occupancy by 240 basis points.

The REIT grew its FFO per share 26% and narrowed its guidance for its FFO per share in the full year from $2.80- $2.85 to $2.80-$2.82. At the midpoint, this guidance implies 24% growth vs. 2021.

As one of the largest self-storage operators, NSA seems to have unlocked significant competitive advantages. During the last five years, it has achieved growth of same-store net operating income of 9.2%. This compares to 7.4%, 9.0%, 9.0%, and 5.6% of CubeSmartCUBE
(CUBE), Extra Space StorageEXR
(EXR), Life Storage (LSI), and Public StoragePSA
(PSA), respectively.

Also given its multi-year contracts and its robust performance throughout the pandemic, NSA should perform well during a recession. Nevertheless, due to its short history, the REIT has yet to prove its resilience.

NSA has grown its dividend aggressively throughout its short history, from $0.54 in 2015 to $2.20 this year. It is currently offering a historic high dividend yield of 5.8%. Its payout ratio is elevated, at 78%, but it’s in line with the REIT’s historical average. Also given its decent balance sheet and its reliable growth trajectory, NSA is likely to continue raising its dividend significantly for many more years.

During its brief history, NSA has swiftly grown its financials thanks to strong growth of rental rates and acquisitions of new properties. We expect future growth to continue to be driven by these two factors, with the REIT claiming an acquisition pipeline of 307 properties. We forecast 8.0% growth of FFO per share over the next five years.

Based on expected 2022 FFO per share of $2.81, the stock trades for a price-to-FFO ratio (P/FFO) of 13.5. This is a historic low for the stock, mostly due to higher interest expense amid rising interest rates. However, our fair value estimate for this REIT is a P/FFO of 16.5.

An expanding P/FFO multiple could boost shareholder returns by 4.1% per year. We also expect annual FFO per share growth of 8.0%, while the stock has a 5.8% dividend yield. We expect total returns of 16.9% per year over the next five years.