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My 3 Favorite REITs Today From 3 Different Sub-Sectors

REITs are an important part of a portfolio if you are looking to protect it against any weather and if you are looking for stable income.

REITs are not only popular because they distribute generous dividends, but also because they are easy to understand. Investors can picture an apartment building or an office tower and see how tenants pay their rent monthly. They are willing to purchase units of those businesses in exchange for income and peace of mind.

The concept of being a landlord and having tenants is comparatively simple to understand. The company owns and manages Real Estate in exchange for receiving rental income from properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels, and shopping malls.

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REITs are an important part of a portfolio if you are looking to protect your portfolio against any weather and if you are looking for stable income. Today, I’m reviewing 3 of my favorite REITs from 3 different sub-sectors.

Essex Property Trust (ESS) – Residential

Essex Property Trust owns a portfolio of 250 apartment communities with over 60,000 units and is developing four additional properties with 955 units. The company focuses on owning large, high-quality properties on the West Coast in the urban and suburban submarkets of Southern California, Northern California, and Seattle.

Source: ESS June 2021 investors presentation

Source: ESS June 2021 investors presentation

Investment Thesis

ESS is everything a REIT should be: they have a dominant position in a thriving market, a decent yield, and a stellar dividend growth history. Most income-seeking investors are looking at REITs with marginal growth opportunities but high dividend yields. If you are willing to invest in a company offering under 4% yield levels, then you will find ESS to be most attractive. Your income will be safe and protected against inflation. Plus, you will likely enjoy some value appreciation over the long haul. During the recession of 2008, ESS kept increasing its dividend while maintaining a strong FFO per share. The REIT positioned itself during the recession to make sure it thrived once the economy was ready to roll again. ESS regularly acquires apartment REITs and successfully integrates them into their business model. Finally, Essex is well-established in rich and growing markets in California and the city of Seattle. This REIT should ride on strong demographics and job growth tailwinds over the coming years.

Dividend Growth Perspective

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This REIT has successfully increased its dividend annually since 1995. Essex has never missed a dividend increase since its IPO in 1994! It generates sustainable funds from operations (FFO) quarter after quarter. During their latest earnings report (ending March 2021), the REIT posted core FFO per share of $3.07 while paying a $2.09/share dividend. That equates to a 68% payout ratio. The most recent dividend increase (+0.5% from $2.078 to $2.09) was disappointing, but we expect future dividend increases to get back in line as the economy recovers. Shareholders can sleep well with a decent yield and a dividend increasing steadily year after year.

Potential Risks

If you read the investment thesis, I think we made it clear that we like ESS. Its narrow market concentration is at the center of its success. In the past, however, we saw similar growth stories end in nightmares. While it seems unlikely to see California become a poor state, a severe economic slowdown may significantly hurt ESS’s business model. ESS is making a play on the tech sector by focusing on tech hubs such as San Francisco and Seattle. The REIT usually offers short leases which opens the door for more revenue volatility. Demand for apartments is often volatile. Building too many properties could end-up with oversupply in the event of a severe recession.

Innovative Industrial Properties (IIPR) – Industrial

Innovative Industrial Properties Inc is a real estate investment trust engaged in the acquisition, ownership, and management of specialized industrial properties leased to state-licensed operators for their regulated medical-use cannabis facilities. It conducts its business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which properties are owned by Operating Partnership, directly or through subsidiaries. Its property portfolio is spread across the United States.

Source: IIPR May 2021 investors presentation

Source: IIPR May 2021 investors presentation

Investment Thesis

The cannabis industry is developing quickly these days, but it’s not happening without the occasional hiccup. A good way to enjoy part of this potential is to go through a REIT that specializes in medically licensed marijuana growers. You won’t get the full hype (as compared to a grower), but IIPR is looking to grow. U.S regulated cannabis sales are expected to go from $12.4B in 2019 to $34B in 2025. Both their funds from operations (FFO) and dividends are following the same trend recently.

Dividend Growth Perspective

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The REIT paid its first dividend in 2017. At this point, the company’s dividend graph looks like a launching ramp. Although we appreciate IIPR’s growth potential, we have used more conservative numbers for our DDM calculations. At the current price, you will also enjoy a solid 3% yield. Expect the yield to decline further as the stock price continues to break new records. Management seems confident in the company’s future as it grows both its business and its dividend at a similar pace. The REIT targets a 75-85% AFFO payout ratio. So far IIPR shows an amazing dividend triangle.

Potential Risks

Make no mistake, IIPR doesn’t touch the actual plant. It is not involved in producing any cannabis related products. However, this doesn’t mean its stock won’t be affected by the hype (or fear). As you can see on the price graph, you can guess that if you invest in IIPR, you also buy a ticket for a roller coaster ride. It’s nice to see a company growing fast, but if management pays too much for their next acquisition or fails to integrate them, it could get ugly. While management goes on a shopping spree for new acquisitions, the cannabis bubble also pushes property prices higher. The cannabis sector is highly sensitive to regulations. What if laws happened to change?

American Tower Corp (AMT) – Cell Tower

American Tower owns and operates more than 180,000 cell towers throughout the U.S., Asia, Latin America, Europe, and the Middle East. It leases space on its towers to wireless service providers, which install equipment on the towers to support their wireless networks. The company has a very concentrated customer base, with most revenue in each market being generated by just the top few mobile carriers. The company operates more than 40,000 towers in the U.S., which accounted for more than half of its total revenue in 2020. Outside the U.S., American Tower’s greatest presence is in India and Brazil, where it operates roughly 75,000 and 19,000 towers, respectively. American Tower operates as a real estate investment trust.

Source: AMT Q2 2021 investors presentation

Source: AMT Q2 2021 investors presentation

Investment Thesis

AMT is part of a very selective group of three major Telco REITs, along with Crown Castle and SBA. In the U.S., data usage tends to double every two years. This is due to the rising amount of video content and Internet of Things applications. With 5G technology, telecoms have no other choice but to keep investing in their networks. On top of that, AMT has a strong international presence. Many countries such as India are about 10 years behind the U.S. in term of network development. This is a great opportunity for AMT. Finally, AMT has established most of its contracts with escalator rates giving predictable revenue growth for the company.

Dividend Growth Perspective

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AMT’s dividend growth history is quite impressive. In 2014, the company was paying $0.29/share. The REIT is increasing its dividend every quarter and doesn’t seem to be slowing down. We have used a 10% dividend growth rate for the next 10 years, but we think the REIT will have to slow down its growth policy at one point. Yet, the stock price doesn’t look so bad considering the past 10-year performance on the market.

Potential Risks

Although AMT shows a strong portfolio of assets, technology could force the company to evolve accordingly. The 5G technology will require more small cells as a network structure instead of massive towers. Therefore, AMT’s large towers (from which it derives most of its income) may not be as attractive in 5 years. Also, with the consolidation of many telecoms, there is a reduction in the number of redundant networks, reducing the number of possible tenants per tower. AMT could grow through emerging markets, but there is no indication the middle-class will grow fast enough to consume data at the same pace North Americans do. Finally, AMT has been on a solid bull ride for the past 10 years, which makes it a great candidate for a major drop in a market crash.

Final Thought

One thing I really like about the REIT sector is how you can easily diversify your portfolio through various sub-sectors. As you saw in this article, an apartment REIT will operate differently than an industrial REIT for example. This provides you with an additional layer of protection against market events. Therefore, you can build up a sizeable position in various REITs and still show a great diversification.


Mike Heroux, Passionate Investor & founder of Dividend Stocks Rock

P.S. Are you concerned by the current state of the market? Download my free DSR Recession-Proof workbook and make sure you don’t suffer during the next market crash.

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**Please do your own due-diligence before investing in any stocks we discuss in this article**

I may hold shares of companies discussed in this article.

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