With the stock market's erstwhile leaders taking a beating during earnings season, investors are looking for alternatives and safety for their investment dollars. Real estate stocks generally benefit from inflation, given that they can raise rents as real estate becomes more expensive to counteract the expense. However, their borrowing costs will lag, as many of these companies managed to lock in great borrowing rates over the past two years.
Here are five real estate stocks that will benefit from this effect and offer a place for investors to confidently shelter $500 (or more) right now.
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1. Realty Income
Realty Income (O 0.55%) is a real estate investment trust (REIT) that focuses on developing single-tenant properties and then leasing them out under long-term leases, which require the tenant to bear most of the operating costs (including taxes, insurance, and maintenance). These leases generally last up to 10 years and have automatic rent escalators factored into the lease.
Realty Income managed to navigate the COVID-19 pandemic better than most REITs because most of its tenants were considered essential businesses and permitted to remain open. While most REITs cut their dividends, Realty Income raised its dividend three times in 2020.
Realty Income is known as a Dividend Aristocrat, which is an elite group of S&P 500 dividend payers that have raised their dividends each year for at least 25 consecutive years. At current levels, the stock has a dividend yield of 4.1% and should be considered a core holding of an income investor's portfolio.
2. American Tower
American Tower (AMT 0.58%) is a REIT dedicated to the development and operation of cellphone towers. The company builds the communication towers and then leases capacity to mobile phone companies, cable companies, and the government.
Demand for mobile data has been growing strongly for the past decade and looks to continue expanding as 5G rolls out and new applications are developed to use the technology. American Tower has an enviable track record of dividend increases -- it has raised its dividend every quarter for the past 10 years. At current stock price levels, American Tower has a dividend yield of 2.2%.
3. Weyerhaeuser
Weyerhaeuser (WY) is a timberland REIT that owns or controls over 25 million acres of timberland in the United States and Canada. It also manufactures wood products such as structural lumber, oriented strand board, and engineered products. Weyerhaeuser is highly correlated with the housing industry, which has been underbuilt for the past 15 years. Inflation has also benefited Weyerhaeuser as lumber prices have risen, which increases revenue and profit margins.
Weyerhaeuser has an unusual dividend structure, where it pays a quarterly dividend that's meant to be sustainable throughout the economic and housing cycle, along with an annual special dividend, which is based on the company's profits in the preceding year. For the 2021 fiscal year, Weyerhaeuser paid $2.63 in dividends, which works out to be a 6.4% dividend yield at current prices.
4. Alexandria Real Estate Equities
Alexandria Real Estate Equities (ARE 2.49%) is an office REIT with an interesting niche. Alexandria focuses on the life sciences sector, which has different needs than the typical office tenant. The company develops sophisticated laboratory facilities and was one of the first movers in this niche market.
Demand for its laboratory space continues to grow, and in the first quarter of 2022, Alexandria reported a 28% increase year over year in revenue and rental growth of 32%. Funds from operations (FFO) increased by 23%. Funds from operations is the preferred method of recording earnings for REITs, given that they have heavy depreciation charges, which tends to understate net income. Alexandria has a dividend yield of 2.4% and is reinvesting 43% of its FFO back into the business.
5. Simon Property Group
Simon Property Group (SPG 1.40%) is an operator of high-quality shopping malls. The company was pummeled by the pandemic, having agreed to buy competitor Taubman Group for cash just before the bottom fell out of retail at the start of the pandemic. Simon managed to renegotiate the deal at a lower price, but the pandemic was particularly difficult for mall operators, as many of their tenants were closed for extended periods and unable to pay rent.
The stock has regained its pre-COVID-19 level, and FFO per share for 2021 was just under 2019 levels. Retailers are able to pass on price increases to consumers, and the labor market remains strong.
Simon took advantage of the ultra-low interest rates over the past two years to refinance a lot of its debt. The company currently pays a weighted average interest rate of 2.86% on its $25.4 billion in debt, which is below the inflation rate. Just over half of Simon's debt matures after 2026, so these low rates will help the company going forward.
Simon pays a dividend yield of 5.23%, which is strong in this environment.
