10 Great REITs To Own For The Next 10 Years
- The fundamentals of the REIT industry remain on solid ground, suggesting that earnings will continue to grow.
- The combination of steady earnings growth and mixed stock price performance has resulted in a decline in the price-to-FFO multiple to 15.9x, the lowest since 2011.
- The price an investor pays for future earnings and dividends is currently the lowest in seven years.
- I’m counting on all of these REITs to grow their dividend annually, it’s not an option, it’s a requirement.
Yesterday I penned an article titled, REITs Are Rocking (Not ‘Dead Men Walking’), in which I provided REIT investors with the blueprint for Intelligent REIT Investing. While REITs are structured as securities, they own REAL ESTATE and it’s important to recognize that the operating fundamentals have improved steadily over the past eight years.
Funds from operations (or FFO) has risen from $4.5 billion in the first quarter of 2010, to $15.3 billion in the first quarter of 2018, an annual growth rate of 16.6 percent (chart below), and several factors have fueled this impressive growth:
(1) Rising rental income year after year from the (same-store) properties owned by REITs; (2) Acquisitions of new properties by existing REITs, as their access to capital markets and their skills at managing properties efficiently have created profitable opportunities to expand holdings, and (3) IPOs by new REITs and conversions of existing companies to REIT status.
The fundamentals of the REIT industry remain on solid ground, suggesting that earnings will continue to grow. For example, the aggregate weighted average occupancy rate of properties owned by REITs was 93.6 percent in 2018:Q1, just 22 bps below the record high reached in the prior quarter. Demand for commercial space continues to grow in line with new construction, and high occupancy rates are likely to continue to support rental increases and FFO growth in the periods ahead.
Yet, despite the sound underpinnings of the REIT industry, equity market performance of the sector has been spotty of late. The combination of steady earnings growth and mixed stock price performance has resulted in a decline in the price-to-FFO multiple to 15.9x, the lowest since 2011. That is, the price an investor pays for future earnings and dividends is currently the lowest in seven years.
Share prices of broader corporate equities, in contrast, have risen faster than company earnings, which lifted the price-earnings multiple for the S&P 500 last year to the highest level since before the financial crisis; price multiples edged back a bit in Q1, but remain elevated (chart above).
Some analysts have warned, indeed, of stock prices being too frothy. It’s not clear just what risks the lofty level of stock prices may pose, but one thing is certain: an investor who wants to buy a dollar of future earnings on the S&P 500 pays a lot more today than in recent history, while an investor in REITs can get future earnings for a lower price today than at any point in the past seven years.
Investing in REITs has historically improved portfolio performance by adding total return and diversifying investment exposures. Current REIT fundamentals and equity market conditions suggest that investing in REITs will likely continue to have such benefits in the period ahead.