Real estate is traditionally touted as an investor's bulwark against such ills as bear markets, inflation, and recession, and real estate investment trusts (REITs) offer the opportunity to build up that bulwark one share -- or many -- at a time. REITs pool together income-producing properties allowing shareholders to invest in real estate without personally owning and managing the physical properties. To maintain a special tax-exempt status, they are required to pay out at least 90% of their taxable income as dividends to the shareholders.
Because they don't typically hold a lot of cash, REITs tend to finance acquisitions either by selling properties, issuing new stock, or borrowing. With rising interest rates in 2022, as well as a troubled market for equities in general and growing economic uncertainty, many REITs are facing some real headwinds at the moment and their share prices are taking a hit.
Publicly traded REITs tend to specialize in properties for specific sectors -- such as retail, healthcare, warehouses, and more -- allowing investors to focus their funds on the industry and/or geographic market they find favorable. Three worthy of consideration right now are Alexandria Real Estate Equities (ARE 0.13%), Crown Castle (CCI -0.03%), and Highwoods Properties (HIW 1.97%).
Each of these REITs' share prices is down about 35% so far this year, underperforming the S&P 500 by a significant margin. However, they also produce higher dividend yields than the broad market. And in recent years, as the chart below shows, each has consistently grown both its dividends and its funds from operations. That's a critical measure of how a REIT generates cash from its portfolio to, among other things, pay those dividends.
ARE Dividend data by YCharts
While each of these REITs is feeling the impact of higher interest rates and other macroeconomic conditions, they also have specific qualities that commend them for investor consideration even though they lag the greater market in total return. For one, their yields are consistently higher than the S&P 500, making them attractive to income investors, which includes me. REITs can be considered competitors with bonds for those investors' dollars, and these trusts, as we'll see below, can be trusted to have greater bounce potential when the economy recovers, for my money's worth.
1. Alexandria Real Estate Equities
Alexandria Real Estate Equities owns a fast-growing portfolio of laboratory and office space properties that it leases to a who's who of biopharma and tech companies, as well as universities and other research organizations.
Its properties are concentrated in its home market of San Diego, the Research Triangle in North Carolina, the Maryland suburbs adjacent to Washington, D.C., and the metro areas of New York City, Seattle, San Francisco, and Silicon Valley.
Since the kind of work done in laboratories can't typically be done remotely, demand for Alexandria's kind of properties is less impacted by the work-at-home trend that is hindering other types of office REITs, and its tenants are particularly reliable rent-payers. At the current share price, Alexandria is yielding about 3.2% -- the lowest of these three REITs -- but that's still nearly twice the yield of the S&P 500 (at 1.8%). And with a payout ratio of 56%, it should be able to keep boosting its payouts, which have averaged growth of 6.5% annually over the past five years.
2. Crown Castle
Crown Castle is one of the 800-pound gorillas in the infrastructure REIT business. It's one of the largest owners of cell towers, small cell nodes, and connecting fiber, and it's rapidly growing its ability to meet the demands of major mobile carriers, as well as thousands of other clients that are seeking to take advantage of the 5G rollout and other connective technologies.
This Houston-based REIT has more than doubled the total return of the S&P 500 since it went public in 1998. That past performance might hard to replicate, but management says its exclusive focus on the U.S. market should help buffer its books as revenues continue to grow from both its traditional tall towers and the rapid rollout of small cell networks and edge-computing capabilities needed to support "smart city" strategies.
Crown Castle also continues to meet the annual dividend-growth target range of 7% to 8% it announced five years ago. In fact, it exceeded that with an average annual payout bump of 9% since the announcement. As its current share price, it offers new investors a yield of about 4.5%. And investors can have some confidence that this REIT and the industry it serves will continue to deliver as demand for bandwidth just keeps growing.
3. Highwood Properties
Highwoods Properties buys, sells, and operates traditional office properties, and that business was particularly hard hit at the start of the pandemic. But this REIT focuses on some highly specific markets and submarkets: It buys high-end space in what it calls the "best business districts" in Atlanta; Dallas; Nashville, Tennessee; Richmond, Virginia; Orlando and Tampa in Florida, and in North Carolina, Charlotte and its hometown of Raleigh.
These Sunbelt markets are among the nation's fastest-growing metro areas, and the company believes that high-end space located near desirable, amenity-laden urban and commuter neighborhoods will remain in demand.
In its third-quarter 2022 report, Highwoods Properties said that new leasing volume was its highest since 2014 and that it posted 0.3% cash rent growth -- not bad in this hard-hit business niche -- while occupancy remained about 90% as new clients offset the loss of others downsizing or leaving entirely. Both its average lease term of more than seven years and its current yield of about 7% add to the optimism I have for this stock, which I recently added to my own portfolio.
Demand should continue for these REITs' spaces
Alexandria, Highwoods, and Crown Castle all operate in different niches of the REIT world, but they share a number of attributes -- among them, fortress balance sheets, strategic investments, and growing presences in stable and expanding markets. They also offer nice dividend payout records that should stand them well through this economy and for years to come.
