Real estate investment trusts (REITs) have been on fire this year as the Federal Reserve has cut benchmark interest rates to keep economic growth going. All in all, the sector proxy — the Vanguard Real Estate ETF (VNQ) — is up nearly 24% year to date on the central bank’s three consecutive rate cuts. It’s easy to see why REITs have been the stocks to buy with those cuts.
REITs benefit from lower rates on several fronts. For starters, as high yielding securities, investors tend to be drawn to the group’s better-than-average payouts when rates are falling. Secondly, REITs have an easier time themselves borrowing money to finance construction, refinance mortgages, and buyout smaller rivals. These lower costs help boost margins and cash flows, which in turn power those higher dividend payouts.
The best part is that there are still plenty of REITs to buy for more gains. With interest rates now low and Jerome Powell giving the signal that the Fed plans on pausing and not raising rates anytime soon, the chance to buy REITs could be now. Those low and paused rates have provided a nice “floor” for the sector.
Any investor looking for income has plenty of choices among the REITs today. With that, here are five REITs to buy that make the most of low interest rates.
Crown Castle International
Dividend Yield: 3.51%
A few years ago, the IRS issued a variety of so-called private letter rulings that transformed the industry. Crown Castle (CCI) is one of the best examples of these REITs affected by it.
CCI doesn’t own buildings, but cell phone towers and other wireless structures. More than 40,000 cell towers, 65,000 small-cell nodes and about 75,000 route miles of fiber pipelines to be exact. And just as you might rent an apartment, telecom firms rent space on Crown’s towers. Lucky for CCI, smartphone adoption has skyrocketed over the last decade. And with 5G rolling out across the country, demand for space on CCI’s towers and infrastructure is only surging further.
Last quarter, CCI managed to see rent revenues jump by 6% as space continues to be constrained. That huge increase in rents — and 6% is a lot for REITs — allowed funds from operations (FFO) to leap forward by 12%. That increase in FFO is significant as the metric represents the amount of cash that REITs have to distribute back to shareholders. With that big increase, CCI was able to increase its payout by 7% last earnings release.
What’s even better is that management at CCI believes that the current bullish environment for wireless tower demand isn’t stopping anytime soon. 5G is only getting started and requires even more coverage than traditional spectrum. As a result, management has continued to guide 7-8% dividend growth for the foreseeable future. That sort of dividend growth is absolutely wonderful with the Fed pausing on interest rates.
Dividend Yield: 4.22%
We’ve talked about the “Greying of America” and the continued demand for healthcare solutions before. This trend has made the property owners in the healthcare sector the REITs to buy for long-term gains. And Healthpeak Properties (PEAK) could be one of the better choices in the sector.
While the name is new, the firm is quite old. Just last month, PEAK used to go by HCP. HCP was one of the first REITs to focus on the healthcare market and has long been one of the premier property owners in the space. That position got better back in 2016 when the firm spun-off all its struggling nursing home businesses. These days, PEAK now owns 740 different properties in the medical office building, senior living and life sciences sectors. These are good places to be as rents for tenants tend to be high and sticky, meaning occupancy rates aren’t necessarily a concern.
What PEAK does for investors is create a steady and high dividend payment. Since it’s spin-off, PEAK has kept its quarterly payout at 37 cents per share.
But before investors balk at that flat payout growth, the REIT has been doing right by shareholders in terms of building its future with its excess cash. This has included building that life sciences portfolio from scratch, developing new private-pay senior living centers and refinancing (thank you, low interest rates) its previous high debts.
With a current 4.22% yield and plenty of long-term potential, PEAK is one REIT making the most of low-interest rates and could be a great choice for investors.
Dividend Yield: 2.32%
Keeping with the “mega-trends creating REITs to buy” theme, rising eCommerce growth is next on our list. Warehouse owners has seen their stars shine as two-day shipping and the sheer growth of omnichannel sales have resulted in unprecedented demand. And when you own of the biggest dogs in the sector, you can’t help but win.
Prologis (PLD) keeps on winning. PLD is by far one of the world’s largest owners of warehouses, industrial and mixed-use space with nearly 3,800 properties across the globe. Top tenants are the who’s who of leading eCommerce and logistics plays including Amazon (AMZN), Walmart (WMT) and UPS (UPS). This strength of tenant quantity and in-demand assets have continued to boost PLD’s cash flows for years. The best part is that Prologis continues to get better.
Thanks to rising cash flows and low interest rates, PLD has continued to plow big bucks into getting that much bigger. The REIT has used smart acquisitions, such as its pending buyout of Liberty Property Trust (LPT), to gain additional warehouse properties. This deal should add at least 10 cents per share to FFO within a year. Rising FFO simply translates to bigger dividends down the road.
In the end, PLD is in the right real estate sub-sector at the right time. With a strong cash flow position and smart M&A, the REIT is one of the best to buy for rising income potential.
Dividend Yield: 2.35%
For real estate, it really is about location. The areas where people want to work, live and play feature better demand than those that don’t have the “it” factor. And you can’t get more in-demand than Southern California and Hawaii. Luckily, for Douglas Emmett (DEI) that’s its main stomping ground.
DEI owns a host of office and apartment buildings in top markets such as L.A. San Francisco, Santa Monica, Beverly Hills, Honolulu, etc. These markets feature robust economies and insanely high demand. The win for the REIT is that space continues to be constrained. There simply isn’t any real room in Southern California or in Hawaii to build new construction. Because of that, rents tend to be high for DEI’s properties.
Things get even better. Thanks to the huge demand, DEI is able to use shorter rental agreements for its office buildings. This allows it to roll-over its rents faster and charge quicker than many of its REIT rivals operating elsewhere. It has also allowed its FFO per share to grow by over 120% since the end of the recession. This has translated into steady dividend growth over the last decade.
With new purchases and deals to expand its portfolio further in these constrained markets, Douglas Emmett is poised to keep shareholders happy during this period of low interest rates.
iShares Mortgage Real Estate ETF
Dividend Yield: 8.6%
With the Fed lowering rates and hinting that they aren’t raising them anytime soon, the REITs to buy may not be the kind that own physical assets. We’re talking about the mortgage REITs (mREITs). These firms either lend money directly to builders and/or buy mortgage-backed bonds. They make money on the spread between their own borrowing costs and what their loans/bonds are yielding. Lower rates benefit them by increasing the spread.
The problem with mREITs is that they can be complex animals to understand. From agency and federally-backed bonds to different segments of the market, there’s a lot to unpack here. To that end, going broad might best. Diversification really does have a place in this sector.
The $1.2 billion iShares Mortgage Real Estate ETF (REM) is the behemoth in the sector. REM tracks a basket of the 36 different mREITs on the market today. That gives you exposure to wide variety of styles and classifications of these firms. Top holdings include Blackstone Mortgage Trust (BXMT) and AGNC Investment (AGNC). The blend also creates an eye-popping 8.6% dividend yield. Talk about making the most of lower interest rates. REM is pretty cheap to hold as well, with expenses running at just 0.48% or $48 per $10,000 invested.
With rates falling, the mREITs should have no trouble keeping their payouts going. And with such a high starting yield, income seekers should flock to the sector and create some nice capital appreciation.
REM isn’t like most REITs on this list, but can be a great addition to an income portfolio in this environment.
At the time of writing, Aaron Levitt held a long position in AMZN
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