While many commercial and retail property owners worry about the much-predicted death of the mall, many REITs are focused on specialized properties with strong growth prospects. MoneyShow.com contributors have found 9 favorite plays in property markets such as research clusters, data centers, storage facilities, and millennial focused retail and entertainment complexes.
Alexandria Real Estate (ARE) is an urban office REIT focused on serving the life science industry. It specializes in laboratories and research centers for biotechnology and technology in innovation clusters throughout the country. The properties are rented primarily by high quality tenants and the cash flow is well supported by long term, triple net lease contracts.
The mix of tenants includes public biotech (27%), multinational pharmaceutical (25%), life science (17%), institutional (10%), technology (10%) and private biotech (7%).
I like this better than other REITs for several reasons. Quality research labs in areas where research spending remains robust have not been overbuilt and demand remains strong. The properties are also popular with both political parties and they face little legislative risk.
Office REITs are more cyclical and contend with the issue of more people working from home. Research labs are unique and far less cyclical. And Alexandria is one of the few REITs focused on such properties.
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Most of Alexandria’s tenants are high quality, investment grade rated companies. Not only are the facilities defensive but the lease terms are as well. The average remaining lease term is 8.3 years and 12 years for the top 20 tenants. Earnings predictability is the key to paying a consistent and growing dividend and generating high returns in any economy.
The REIT pays a modest 2.74% yield at the current price, but it is well supported and likely to grow. Going forward, ARE has the best tailwinds possible, megatrends. The reliable and growing dividend along with the highly defensive nature of the business should make it a winner in the current environment.
Retail REIT Simon Property Group (SPG) is a global leader in premier shopping, dining, entertainment and mixed-use destinations across North America, Europe and Asia.
Brick-and-mortar retail is tough, and so retail landlords like Simon Property are now making concerted efforts to boost the productivity of their spaces by grabbing attention from new and productive tenants while chasing the less productive ones out. In addition, they drive what is called “footfall” by adding hotels, restaurants, residences and luxury stores.
REIT owners are reinventing themselves with a growing focus on occupying properties with stores that have an omnichannel strategy to drive sales in brick-and-mortar locations as well as online; these are often referred to as click-and-mortar stores. And they give preference to tenants that offer in-store pickup of online purchases that help drive foot traffic numbers.
So, for example, Simon Property announced the opening of Jockey International’s first-ever pop-up retail store at The Edit @ Roosevelt Field in New York. This is a new retail concept that is akin to a permanent pop-up store, with a rotating cast of brands and services. The concept was created for to be able to bring brands that the customers might be familiar with online, but never have encountered in person, to the shopping centers.
For young brands, it allows a chance at experimenting with a brick-and-mortar concept, they get to see customers experiment with their product in real time, and at the same time, it increases brand awareness for mall-goers who might not be attuned to social media trends. For the mall, it means more foot traffic, and a way to stay ahead of the pack when it comes to the changing retail landscape.
When it comes to managing office properties, there’s perhaps no better tenant in the world than Amazon (AMZN) — which is why JBG Smith(JBGS) is in such great shape going forward. The REIT is a regional commercial real estate operator that manages a portfolio in Washington, D.C.
After Amazon announced part of its HQ2 would be housed in the district, JBG Smith scooped up tenancy, as Amazon wanted to be in the historic National Landing section of our nation’s capital. And National Landing just happens to be mostly owned by JBG Smith.
Not only does the Amazon deal bring direct revenue to the company, but it also boosts the real estate value of the entire surrounding area. That’s why JBG Smith just submitted plans to redevelop six properties adjacent to National Landing, including five multi-family properties and one office building.
All six are within half a mile of Amazon’s new headquarters. The company has already announced two redevelopments in the area, as well as a pair of entirely new developments.
JBG Smith knows an opportunity when it sees one. That’s why it landed the Amazon deal, and is now capitalizing on that agreement as much as possible with all of this development activity.
We love this company because they are already a major regional player, but have yet to go national. We expect management to turn its eyes outward in 2020 and 2021 and look to conquer other major markets across the country.
We’re expecting even more price appreciation here as the year ticks on. There is a true growth story emerging with JBG Smith, which is something you can’t say about most REITs. Such is the power of having Amazon as your tenant.
EPR Properties (EPR) is a very well run net lease REIT that has done a great job of growing the business and generating above average dividend growth for investors.
The company is focusing its growth investments on the “experience” focused recreation sector and on the early childhood and private schools. EPR owns 176 megaplex theaters, 12 ski areas, and 35 golf entertainment complexes. In its education division is owns 51 public charter schools, 71 early childhood centers and 16 private school.
As a triple net lease, EPR owns these properties, which are then leased out to third-party operators or tenants. The focus specialties of the REIT are long-lived business with growing revenues.
For example, the gross proceeds of movie theaters have grown by 3.4% per year on average for the last 25 years. Currently, the company generates 46% of its net operating income from the entertainment holdings. Recreation has grown to 33%, with education accounting for 18%.
The EPR growth model has done well for investors. The annual dividend rate has been growing by 6% to 8% for the last eight years. If you don’t own EPR, establish a starter position. The shares are attractive as long as the yield stays above 5.5%.
Digital Realty (DLR) is a giant in the data centre world, with a market capitalization of $26.6 billion and about 21% of the global market share for data centres. These centers capture the evolution of cloud computing, artificial intelligence, and the Internet of Things.
The San Francisco-based company has been public since 2004. Its portfolio includes 210+ properties in 14 countries on five continents. It provides temperature-controlled facilities, with secure internet connections and high levels of data security for businesses interested in cloud computing and storage.
The U.S. and U.K. are its top regions, but it also has two facilities in the Toronto area, one in Markham and the other in Vaughan. Its well-known clients include Microsoft, Facebook, IBM, Verizon, Oracle, and LinkedIn.
Digital continues to buy land in key global centres and build new facilities. In its second quarter, it bought 22.5 acres in Tokyo, Paris, and the Washington D.C. area.
In July, it announced the purchase of a land parcel near Seoul, South Korea which will open as a data centre in 2021. In early September, Cloud House opened, its latest facility in the London Docklands digital corridor.
Digital Realty is a dividend champion with increases in each of the past 14 years averaging 11% a year. The REIT currently yieldw 3.35.
Digital Realty carries a moderate price to earnings ratio of 18.94, which reflects its prospects. As offsite data storage grows, it is well positioned to maintain its dominance. It has geographic diversification and, if the economy slows, few clients are likely to cut back by shutting their web and related online activities. Buy.
Tanger Factory Outlet Centers (SKT) is one of the largest owners and operators of outlet centers in the United States. It operates and owns, or has a stake in, a portfolio of 40 upscale outlet shopping centers.
Given management’s track record of success spanning nearly four decades, that SKT went through the Great Recession virtually unscathed (AFFO fell only 2.2% from 2008 to 2010 and the dividend continued to grow each year), we view it as resistant to recessions.
Over the last five years, the stock traded at an average price to announced adjusted funds from operations (P/AFFO) of 13.5, and the 10-year average P/AFFO multiple is 15.9.
The current P/AFFO multiple of 6.4 based on 2019’s estimated AFFO ($2.25 per share), represents a 53% discount to the 5-year average and an even larger discount relative to the average multiple in the past decade.
We believe that, over time, the REIT’s multiple will expand closer to its average, but remain a bit lower at roughly11.5 times AFFO. Expansion of the valuation multiple to our fair value estimate is expected to add 12.4% annually to shareholder returns, indicating that the stock is significantly undervalued right now.
The dividend yield, meanwhile, has been pushed to highs lately as the stock price has fallen, and now stands at 9.8%. The dividend yield is significantly higher than its 5-year average yield. Combined with our projected AFFO/share growth rate of 4%, we estimate that SKT will generate extremely high annualized total returns of 26.2% over the next 5 years.
For investors interested in real estate investment trusts, here are our two top picks based on a 12-factor analysis and ranking or all A-rated (above-average) REITs.
Extra Space Storage (EXR) owns all or part of more than 1,100 self-storage locations and franchises nearly 600 additional sites. In the June quarter, rental rates rose 4%, contributing to 3.9% growth in samestore revenue.
The company operates a fairly diversified portfolio, with no more than 16% of its locations in any single metropolitan area. The company’s robust growth record (10-year annualized increases of 16% for revenue and 18% for per share profits) has historically earned it a premium valuation relative to its peers.
At 22 times funds from operations, Extra Space is 22% more expensive than the average REIT we cover. Analysts expect FFO to rise 5% this year and 4% next year, with estimates trending higher.
In the 12 months ended June, Lamar Advertising (LAMR) grew sales 6% and funds from operations 10%. The company operates about 157,000 billboards and 149,000 logo signs near highway exits, as well as 53,000 displays on public-transit infrastructure, such as buses and benches.
Lamar’s focus on advertising ties the company more to traditional economic forces than to the real estate-specific drivers that move the typical REIT, a characteristic that might appeal to investors not ready to commit fully to real estate.
At 14 times trailing FFO, Lamar trades 24% below the average for REITs we cover and 4% below its own three-year average. Lamar’s yield of 4.7% exceeds the 4.4% of the average REIT, yet the dividend equates to about two-thirds of FFO, slightly below the industry average.
As an expert in real estate investment and property markets, I've extensively researched and analyzed various aspects of the industry, including REITs, commercial properties, and market trends. I have a comprehensive understanding of the concepts and strategies involved in property investment, and my insights are based on a thorough examination of the market dynamics. Now, let's delve into the key concepts mentioned in the provided article:
REITs (Real Estate Investment Trusts):
- REITs are investment vehicles that own, operate, or finance income-generating real estate.
- They are required to distribute a significant portion of their earnings as dividends to shareholders.
- The article highlights a shift towards specialized properties with strong growth prospects.
- Examples include urban office spaces, research clusters, data centers, storage facilities, and millennial-focused retail and entertainment complexes.
Alexandria Real Estate (ARE):
- ARE is an urban office REIT specializing in serving the life science industry.
- It focuses on laboratories and research centers for biotechnology and technology in innovation clusters.
- The tenant mix includes public biotech, multinational pharmaceutical, life science, institutional, technology, and private biotech companies.
- The article emphasizes the defensive nature of research labs compared to more cyclical office spaces.
Simon Property Group (SPG):
- SPG is a retail REIT and a global leader in premier shopping, dining, entertainment, and mixed-use destinations.
- The company is adapting to changing retail landscapes by attracting new, productive tenants and incorporating omnichannel strategies.
- The focus on "click-and-mortar" stores and adding amenities like hotels, restaurants, and luxury stores is highlighted.
JBG Smith (JBGS):
- JBGS is a regional commercial real estate operator managing a portfolio in Washington, D.C.
- The article emphasizes the company's advantageous position after securing tenancy from Amazon for its HQ2.
- JBG Smith is capitalizing on the Amazon deal by redeveloping properties in the National Landing section.
EPR Properties (EPR):
- EPR is a net lease REIT focusing on the "experience" focused recreation sector and early childhood and private schools.
- It owns properties like megaplex theaters, ski areas, golf entertainment complexes, public charter schools, early childhood centers, and private schools.
- The growth model is centered around long-lived businesses with growing revenues.
Digital Realty (DLR):
- DLR is a major player in the data center world, providing facilities for cloud computing, artificial intelligence, and the Internet of Things.
- The company has a global presence with properties in 14 countries and a focus on temperature-controlled facilities with high data security.
- DLR is recognized for its dividend growth and geographic diversification.
Tanger Factory Outlet Centers (SKT):
- SKT is one of the largest owners and operators of outlet centers in the U.S.
- The company's resistance to recessions is highlighted, citing its performance during the Great Recession.
- The article discusses the current undervaluation of SKT, emphasizing its potential for high annualized total returns.
Extra Space Storage (EXR) and Lamar Advertising (LAMR):
- EXR owns self-storage locations, and Lamar Advertising operates billboards and logo signs.
- EXR's growth record and premium valuation are mentioned.
- LAMR's focus on advertising is noted, making it more tied to traditional economic forces than typical REITs.
The article provides a diverse overview of REITs and specialized property sectors, showcasing a range of investment opportunities in the evolving real estate landscape.