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This past year has been the ultimate stress test for real estate investment trusts (REITs). Some failed, as a couple of REITs went bankrupt, while many others slashed or suspended their dividends. On the other hand, many REITs passed with flying colors as they continued growing their portfolios and payouts this year. One common characteristic in that latter group is that they benefited from having high-quality portfolios and solid balance sheets.
Three REITs that currently stand out for having some of the best safety features are Realty Income (NYSE: O), Prologis (NYSE: PLD), and Mid-America Apartment Communities (NYSE: MAA). Here's a look at why investors seeking low-risk REITs should check out this trio.
A model of dependability
However, Realty Income's portfolio has held up reasonably well. While some of its theater, health and fitness, and general merchandise tenants have struggled, the REIT's rental collection rate has averaged above 93% over the past several months. That's due to its focus on securing triple-net leases with investment-grade tenants.
Thanks to that strong rental collection rate, Realty Income generated more than enough AFFO to cover its dividend (its payout ratio was 85.7% during the third quarter). Add that cushion to the company's top-notch balance sheet -- it's one of only eight REITs with A-rated credit -- and it's had the confidence to continue growing its dividend, recently notching its 92nd consecutive quarterly increase.
Meanwhile, Realty Income has also had the financial flexibility to continue making acquisitions, expecting to buy $2 billion of properties this year. Those new additions should enable it to continue growing its dividend in the coming quarters.
In the right place at the right time
Industrial REIT Prologis has benefitted from the pandemic because it's caused companies to rethink their need for warehouse space. As a result, the company has increased its guidance twice and now expects its core FFO to grow by a sector-leading 13.7% this year. That has the REIT on track to produce enough cash to cover its dividend by 1.6 times, leaving it with $1.1 billion in excess cash.
Prologis also has a strong balance sheet, as it's in the elite group of A-rated REITs. When combined with its excess cash flow, it has significant financial flexibility. As a result, it has plenty of funding to expand its portfolio via development projects and acquisitions. That should enable it to continue growing its dividend, even if the economy hits another speed bump.
Location, location, location
Residential REITs focused on high-cost coastal cities' urban cores have taken it on the chin this year. Renters in these regions have left in droves due to their flexibility to work from home during the pandemic. They've moved to suburban areas and lower-cost cities in places like the Sun Belt.
That trend has benefitted Mid-America Apartment Communities. Not only has occupancy held up relatively well, but it was able to increase its rental rates. As a result, its FFO through the third quarter has risen year over year. Further, the company noted that demand during the third quarter was strong and growing, suggesting its cash flow will continue expanding.
Meanwhile, Mid-America Apartment Communities complements its rock-solid portfolio with a top-notch balance sheet. While it doesn't have A-rated credit, it's only one notch below that level, and its leverage ratios are well below the apartment sector averages. On top of that, it has a conservative dividend payout ratio, as it's already generated $4.78 per share of FFO through the third quarter, more than enough to cover its annual dividend outlay of $4 per share. Add it up, and Mid-American Apartment Communities checks in as one of the safest REITs in the apartment sector.
Realty Income, Prologis, and Mid-America Apartment Communities have two things in common. First, they have high-quality real estate portfolios that have proven their resilience this year. On top of that, they have top-notch financial profiles, including conservative dividend payout ratios and high-quality credit. These factors mean they're among the safest REITs around, making them great buys for investors looking for lower-risk real estate plays.
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