Here's why these 3 REITs are our favoriteSep 01, 2021
Published on July 28, 2021
Today we'll be breaking down our top 3 REITs. If this sounds familiar it is because we covered this back in January and are updating the projections of our top 3 REIT's. Feel free to skip to the bottom of the page to see the updates directly.
In today's times, having real estate in your portfolio is a truly smart way to hedge against inflation. If you're wondering to yourself, "what is a REIT?" We're here to help you understand before jumping into our analysis.
Real estate investment trusts (REITs) offer investors a way to invest in commercial real estate properties by buying a stock in the management / holding company - without having to actually own, manage, or maintain the physical property. This is a huge benefit as buying and holding real estate is often extremely expensive and hard to liquidate. But with REITs you have indirect ownership and can sell it the same day you buy it!
When looking at different types of REITs we see that they are the companies that own and operate income-producing real estate, such as apartments, data centers, factories warehouses, self-storage facilities, malls, hotels. Any property type you can think of - there is probably a REIT for it.
So, how do you make money in REITs?
When investing in a REIT, there are two ways to make money: dividend income and capital appreciation of the share price of the REIT.
We’ll start with income.
- Much like owning a physical property, investing in a REIT typically provides income in the form of a dividend. REIT owners collect dividends similar to how real estate owners collect rent payments. In fact, REIT companies are required by law to return at least 90% of their annual taxable income in the form of dividends to shareholders. REITs typically pay dividends somewhere between 3-8%, which is far greater than most non-REIT stocks.
Next is capital appreciation.
- Share prices of REITs can fluctuate just like any other stocks, based on factors like earnings, market sentiment, EBITDA, management changes, etc. As a general rule of thumb, changes to REIT prices are closely tied to changes in demand for the underlying properties it owns. For example, this past year, REIT's with large exposure to commercial office space vastly underperformed the market as corporations moved toward a work from home environment. On the other hand, REIT's with large exposure to data center facilities and properties did well, as demand for property to host cloud computing servers increased dramatically.
We believe that REITs will outperform many other asset classes over the coming 1-3 years, primarily because of their attractive dividend yields. Currently we are in one of the lowest interest rate environments of all-time. This has caused conservative investors seeking income to leave more traditional income producing assets like treasuries, and municipal bonds, and seek higher yields in vehicles like REITs. We believe this trend will continue, and think that allocating a portion of a diversified portfolio to REIT's is smart!
Historically speaking, REITs have offered strong returns relative to the broader market.
- Some data to back that up: Nareit found that from 2000-2019, the FTSE NAREIT All Equity REIT index (tracks all publicly traded REIT's) outperformed the Russell 1000, a stock market index of large-cap stocks. The REIT indexed investments saw a total return of 11.6% annually (including dividends) versus the Russell 1000’s 6.29%.
Different types of REITs:
As we mentioned above, you can find a REIT to invest in almost any type of property. Currently, we like REIT's whose tenants are in growing sectors - namely technology. We are currently avoiding REIT's that have heavy exposure to traditional retail outlets (like malls or storefronts), and heavy exposure to residential urban apartment properties - as individuals have begun to leave cities in the work-from home world.
So with that context, let's dive into the REITs that we previously recommended and give you our updated price targets!
1) Equinix (EQIX):
Original Thesis: Equinix is a data center REIT. It’s dividend yield (1.41%) is significantly less than that of other REITs, but this is more of a capital appreciation play based on the demand for the underlying property.
The number of companies looking for ways to store and secure their data has increased massively in recent years. In fact, Cisco expects data center traffic to grow by 25% per year. EQIX is essentially the blue-chip data center REIT with the largest market cap of any of the group (~$67 billion).
Update: Our thesis on EQIX has not changed at all. Up 13% since we recommended them less than 6 months ago, the stock is doing nicely YTD. However, the stock's revenue and cash flow has grown strongly the last few quarters. With the economy rebounding and interest rates starting to peak up slightly, this REIT should be less exposed to interest rate changes and continue to grow nicely amidst some strong financial growth!
Price Target: $995 (~18% upside)
Target Date: January 2022