Real estate investment trusts (REITs) performed very well in 2019. The average one produced a 28.7% total return, according to the National Association of Real Estate Investment Trusts (NAREIT), which tracks performance data for the sector. Several generated even stronger gains with yield-thirsty investors flocking to the space as the Federal Reserve cut interest rates.
While the sector likely won't produce quite such high returns in 2020, several REITs stand out as those that could deliver market-beating total returns in the coming years. Two particularly compelling ones to buy right now are:
- Brookfield Property REIT (NASDAQ: BPR)
- Medical Properties Trust (NYSE: MPW)
Diversification pays dividends
Brookfield Property REIT, the REIT subsidiary of global property partnership Brookfield Property Partners (NASDAQ: BPY), produced a solid return in 2019. Overall, shares gained about 15% while its high-yielding dividend boosted its total return to nearly 23%. That strong showing came even though it was a rough year for regional mall REITs as the average one produced a negative total return of almost 10%.
Brookfield Property, however, bucked that trend thanks to its diversification. In addition to operating 123 premier retail properties in the U.S., the company also has an extensive global office portfolio as well as investments in several real estate-focused private equity funds managed by its parent Brookfield Asset Management. Those funds invest in a variety of real estate classes, including multifamily, logistics, and hospitality.
Brookfield's core retail and office portfolios generate stable cash flow from long-term leases. That gives it the funding for its dividend, which currently yields 7.3%. Meanwhile, its private equity investments produce high returns, providing it with the money to invest in development and redevelopment projects in its core portfolio. The company currently has $6.5 billion of office and multifamily projects under construction that should grow its rental income over the next several years. In addition to that, it has identified about $5 billion of redevelopment opportunities within its retail portfolio to build residential, hospitality, office, and new retail projects, which should help boost the earnings of that business.
Those development and redevelopment projects, when combined with rental growth and continued investment gains within its private equity investments, set Brookfield up to continue growing its funds from operations (FFO) at a mid- to high-single-digit annual rate over the next few years. Because of that, the company believes it can increase its high-yielding dividend by 5% to 8% per year. That combination of yield and growth sets Brookfield up to potentially produce total annual returns in the mid-teens, making it a great REIT to buy these days.
A healthy pipeline of acquisition opportunities
Medical Properties Trust, a healthcare REIT focused on owning hospitals, delivered a standout performance in 2019. Shares of the company gained more than 31%, while its total return approached 39%. Driving that excellent showing was the company's active acquisition program. Through the third quarter, it has bought and leased about $3.7 billion of hospital real estate, growing its asset base by 40%. Meanwhile, it secured two more transactions by year-end, adding another $2.7 billion to its haul.
The company appears poised to announce more acquisitions in 2020. Medical Properties noted in its third-quarter earnings release that it had about $5 billion of deals in its pipeline, implying that it still has around $2.5 billion of additional opportunities that it's pursuing.
Any future additions will add to the company's FFO, which it currently expects will grow to an annualized range of $1.65 to $1.68 per share upon closing all its 2019 acquisitions. At the midpoint, that's about 22% above 2018's level. Further, it implies a low payout ratio of around 62% for its 5%-yielding dividend, giving it plenty of room for future increases. Add to that the fact that Medical Properties has a conservative leverage ratio, and it appears poised to continue producing double-digit total returns for investors, making it a great REIT to buy now.
Great REITs for growth and income
Brookfield Property REIT and Medical Properties Trust both offer investors above-average dividends that they expect to continue increasing. Because of that, they should be able to continue producing strong total returns. That upside potential makes them great REITs to buy right now.
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