As the U.S. recovers from the coronavirus, investors are eagerly waiting for 2021 to arrive. Real estate investment trusts, or REITs, are among the industries most looking forward to closing the book in 2020. The pandemic led to store closures and stay-at-home orders across the country, which had a devastating impact on REITs.
But not all REITs are created equal.
The following five REITs performed relatively well throughout 2020, maintaining strong occupancy thanks to their recession-resistant business models. These REITs also maintained (or even increased) their dividends this year, while so many other REITs had to cut or suspend their dividends.
Best REIT #1: Realty Income (O)
Realty Income (O) - Get Report operates in the retail real estate industry, which has been under pressure over the past few years due to the boom in e-commerce growth. Internet retail has lured consumers away from physical brick-and-mortar stores. The coronavirus pandemic only accelerated this trend in 2020.
Fortunately, Realty Income is extremely well-managed and has so far performed relatively well in a very challenging climate. In the 2020 third quarter, adjusted funds from operation (AFFO) fell just 2.4% on a per-share basis, a mild decline from the same quarter last year. The company collected 93.6% of contractual rent in November, up from 93.3% in October, indicating a continued recovery from the pandemic.
The company has a diverse tenant portfolio, made up mostly of retailers that lead their respective industries. For example, Realty Income’s top three tenants are Walgreens (WBA) - Get Report, 7-Eleven, and Dollar General (DG) - Get Report, which see steady demand and foot traffic even during recessions. A high-quality tenant portfolio helps Realty Income generate enough cash flow to maintain its dividend.
Realty Income has declared 606 consecutive monthly dividend payments throughout its 51-year history and has increased its dividend 107 times since its initial public offering in 1994. It recently hiked its monthly dividend by 0.2%, bringing the total dividend growth rate for 2020 to roughly 3%. Due to its long history of annual dividend increases, Realty Income is a member of the Dividend Aristocrats. The shares currently yield 4.7%.
Best REIT #2: Essex Property Trust (ESS)
Essex Property Trust (ESS) - Get Report is a multi-family REIT focused on the U.S. West Coast. It is also a Dividend Aristocrat, just like Realty Income. Approximately 83% of Essex’s net operating income is derived from California, with the remaining 17% from Seattle. Essex has ownership interests in 245 apartment communities consisting of over 60,000 apartment homes.
Essex Property Trust has generated steady growth for many years. According to the company, Essex produced 8.4% annual FFO-per-share growth, along with 6.4% annual dividend growth since its IPO. This growth is because of its focus on high-quality properties. West Coast states such as Washington and California have high economic output as well as limited supply.
It also has a strong balance sheet which has helped fuel its dividend growth. Essex has a solid BBB+ credit rating, which is high for a REIT. The stock has a 3.5% current dividend yield, and the company has increased its dividend for 26 consecutive years.
Best REIT #3: SL Green (SLG)
SL Green (SLG) - Get Report owns commercial properties in New York. In fact, SL Green is Manhattan’s largest office landlord, with nearly 100 buildings totaling 41 million square feet. Its properties are spread across office and retail properties.
The company has generated steady results in 2020. In the most recently reported quarter, same-store net operating income increased by 2% from the same quarter last year, while the company maintained an occupancy rate of 94.2%. SL Green collected 96.9% of total billings for office, 70.0% of billings for retail and 92.6% of total billings for the quarter.
SL Green is an attractive dividend stock, because of its 6% dividend yield and it also pays a dividend each month. SL Green recently raised its monthly dividend by 2.8% and simultaneously approved a special dividend of $1.6967 per share. SL Green separately announced a $500 million increase to the company’s share repurchase authorization, bringing the total buyback to $3.5 billion.
Best REIT #4: STAG Industrial (STAG)
STAG Industrial (STAG) - Get Report is focused on single-tenant industrial properties and has ~450 buildings across 38 states in the United States. The company typically does business with established tenants to reduce risk. It also pursues broad geographic and tenant diversification to further reduce risk. STAG is a growth-oriented REIT due to its ownership of properties that are benefiting from the e-commerce boom. According to the company, approximately 40% of STAG’s properties are exposed to e-commerce.
E-commerce was a growth industry heading into 2020, and the coronavirus pandemic only accelerated this trend. As a result, STAG has performed well this year. In the third quarter, core FFO grew 17% over last year’s quarter thanks to the sustained strength of the tenants of the REIT. Net operating income grew 15% year over year. Occupancy remained high at 96.3% while rent collection reached 98% in the third quarter.
The property portfolio has held up extremely well, as consumers and businesses still need industrial services such as e-commerce, even in the pandemic. As a result, tenants that have requested rent relief equal just ~1% of the annual base rent.
The company has also paused acquisitions to preserve cash, and secure the dividend. STAG yields nearly 5%.
Best REIT #5: W.P. Carey (WPC)
W.P. Carey (WPC) - Get Report is a commercial real estate focused REIT that operates two segments: real estate ownership and investment management. W.P. Carey has an enterprise value of approximately $18 billion and a portfolio consisting of 1,215 net lease properties covering approximately 142 million square feet. Properties include single-tenant industrial, warehouse, office, retail and self-storage.
Its diversified and high-quality property portfolio has helped the company generate steady growth, even in a highly challenging environment. FFO-per-share increased 3% in the third quarter and W.P. Carey had 99% rent collection in October, indicating its underlying strength. For 2020, W.P. Carey expects FFO-per-share in a range of $4.65 to $4.75. This is more than enough to cover the current dividend and provide room for small dividend increases.
W.P. Carey has a history of increasing its dividend several times a year. Most recently, the company upped its dividend by 0.2%. The company has increased its dividend every year since 1998, due to its investments in new properties. Since 2012, the REIT invested more than $10 billion. The balance sheet is in good shape, with an investment-grade credit rating of BBB from Standard & Poors and limited maturities through 2022.
With a high dividend yield of around 6%, W.P. Carey is a top income stock for 2021.
At the time of publication, Ciura had no positions in any stocks mentioned.
Borchardt is a regular contributor to Real Money Pro, TheStreet’s premium site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Mark Sebastian, Paul Price, Doug Kass, and others.