What's one thing that every major business needs to operate? If you guessed something along the lines of "a place to work from," you're right on the money -- and that's what makes commercial real estate landlords particularly attractive investments amid a recession.
Whereas consumer-facing companies might suffer from price-sensitive people stashing money under the mattress instead of buying goods during hard times, commercial real estate investment trusts (REITs) in expanding industries will keep collecting rent from their tenants, who aren't about to stop paying unless they're literally on the verge of going out of business.
Plus, they tend to pay meaty dividends to attract investors, which means they yield a lot of passive income per dollar invested. Follow along and take a look at a pair of examples of such companies if you're looking for some new options for making regular inflows from your portfolio.
1. Alexandria Real Estate
When biopharma companies need to rent laboratory and office space in the cities where the best scientific talent congregates, Alexandria Real Estate Equities (ARE 0.13%) is ready to be their landlord. Major players like Pfizer, Moderna, and Eli Lily all choose to lease from Alexandria, not to mention a plethora of lesser-known biotechs. Given that these businesses are multinational corporations, it's safe to say that they're good for their rent payments, even if the economy is struggling. And such companies make up 50% of its annual rental income.
Its forward dividend yield of 3.3% might not seem like much, but in the past 10 years, its dividend has grown by 123%, and it's likely to continue growing for years even if it doesn't keep developing and renting out fresh properties. That's possible because a whopping 97% of its leases entail a 3% annual rental rate increase, and its tenants have a weighted average remaining lease term of 7.3 years.
Of course, Alexandria is constantly purchasing new spaces in key biomedical hubs like Boston, so it shouldn't have much problem continuing to grow as long as the biomedical sector keeps growing too. And with more than $775 million in cash in the bank, it isn't at any risk of needing to issue new stock to raise capital for property purchases or improvements, so shareholders can invest knowing they are very unlikely to face dilution.
2. NewLake Capital Partners
NewLake Capital Partners (NLCP) is another specialized commercial REIT that focuses on the cannabis industry, to which it leases out cultivation floorspace and a few retail storefronts. Much like Alexandria, its leases command a 2.6% annual increase, and its tenants have an even longer weighted average remaining lease term of 14.3 years.
However, since NewLake has only been around since 2019, it doesn't yet have the same history of hiking its dividend, which currently yields more than 7.8%. The flip side of being relatively new is that early shareholders will have the benefit of any dividend hikes that happen moving forward, and management has cited such increases as a priority.
The REIT's strategy is to execute sale-leaseback transactions in states where there are a finite number of licenses to legally grow or sell cannabis. That way, the amount of competition facing its tenants is strictly limited, thereby decreasing the chances of default and ensuring that NewLake can continue to pay out to investors for years and years.
Further appealing is its continued growth during the ongoing economic turmoil; in Q1, it reported net income of just over $5 million, more than 86% higher than the prior year. It also recently entered into a revolving credit facility with an initial cap of $30 million in borrowing power, so it has plenty of fuel to keep growing by buying and renting properties.
