REITs(Real Estate Investment Trusts) come in many different types. When you think about real estate, I’m sure apartments or office buildings come to mind first. But did you know you could also invest in farmland? or data centers? or even billboard signs? Basically, if its an asset and you can charge rent, it can be a REIT.
Steady dividend payments and some with their recession-proof nature make REITS my favorite type of investment and make up the bulk of my investment portfolio. No, I’m not going go over every type of REIT out there. Instead, I’m going to focus on the REIT sectors that make the top of my list and sectors that I would NEVER touch.
Below is a chart showing Funds from Operations(FFO) from all REIT sectors. REITs have benefited from a low interest rate environment.
Don’t Invest Blind! Here Is What I Look For
REITs or non REITs, I use the same investment philosophy. I look for a strong competitive advantage that keeps the barrier to entry high enough to keep competitors out. This is not easy to find with REITs so sometimes you have to do some digging. Maybe they have strategic partnerships. Maybe their properties are in locations where there’s no room for new development. These factors matter.
Having a competitive advantage is great. But is there enough runway for growth? I don’t always prefer investing in large well-capitalized REITs. Sometimes a company can get too large and no longer have the platform to keep growing. We’ve seen this with Public Storage(PSA) and Boston Properties(BXP).
Alternatively, if you can stomach a bit more risk, newer up and coming REITs can be a good choice. For a new REIT to attract investors in the first place, they have to be different. By being different they would have to be very specialized or tap into a profitable market that the bigger players missed. This is the best opportunity for capital growth.
Top REIT Sectors
So while we’re on the hunt for growth and a strong competitive advantage, its time to take a look at the best REIT sectors with a focus on sustainability and future outlook.
1) Data Centers
|5 Year Revenue Growth||16%|
|5 Year Dividend Growth||14.5%|
|Favorite Company In This Sector||CyrusOne Inc (CONE)|
2) Communications Infrastructure
|5 Year Revenue Growth||10.1%|
|5 Year Dividend Growth||14.1%|
|Favorite Company In This Sector||American Tower(AMT)|
|5 Year Revenue Growth||6.43%|
|5 Year Dividend Growth||5.5%|
|Favorite Company In This Sector||STAG Industrial(STAG)|
4) Manufactured Homes
|5 Year Revenue Growth||12.6%|
|5 Year Dividend Growth||5.1%|
|Favorite Company In This Sector||Equity LifeStyle (ELS)|
5) Self Storage
|5 Year Revenue Growth||9.7%|
|5 Year Dividend Growth||12.3%|
|Favorite Company In This Sector||CubeSmart (CUBE)|
REIT Sectors To Avoid
There’s not much to love about residential apartments. Since apartments are as traditional as real estate gets, the barrier to entry is very low which makes it hard to achieve meaningful growth. This isn’t a sector that you need to run from like shopping malls but I would rather put my money where the growth is.
When investing sometimes you need to let go of past performance and focus on the future. Thats said, we won’t see more demand for office space going forward. We aren’t living in the 1980’s and this remote work trend we see taking place definitely won’t help them.
Let’s face it. Malls are a huge inconvenience. If you live in a major city, you can spend a whole Saturday making a shopping trip. They just don’t have the purpose they once had and retailers are struggling to stay in business. The largest publicly traded mall landlord, Simon Property(SPG) will soon be battling it out in court after backing out of a $3.6 billion merger with Taubman Centers. Oh, and good luck trying to raise cash by selling shopping malls that nobody wants.
The Future Of REITs
So what does the future hold? No, you don’t need to pull out a crystal ball but it’s easy to spot the trends just living your day to day life. With the rise of smartphones and online retail, you can be certain we will need more data centers. Speaking of the e-commerce boom, what do they need besides data storage? Warehouses!
Don’t forget about babyboomers. Retiring babyboomers will typically downsize once they don’t have their 9-6 income coming in. What kind of home are they buying? Manufactured homes! The industry is booming right now and there’s no sign of it slowing down anytime soon.
Sure, this all seems pretty obvious but we don’t always see the writing on the wall. People will jump into Macy’s because of the high dividend yield and think they are getting a real discount. This kind of investor doesn’t think about how the turnaround will take place. Don’t be this investor. Stick to what you know and look at the long term growth potential.
If you want to invest in green energy, Hannon is a pure-play. They are in the lending business so the physical income-producing assets they own represent a small portion of their business. They only focus on climate solutions so they primarily lend to wind and solar projects. With the world shifting to green energy, Hannon Armstrong is poised to benefit from the fight against climate change.
Brookfield Infrastructure Partners (BIP)
OK, so it’s evident that I love infrastructure-related REITs. Brookfield Infrastructure owns a wide range of assets including toll roads, rail systems, pipelines, and communication towers. They focus on 4 main sectors(Energy, Transportation, Utilities, and Data Infrastructure. They have a unique focus and are very diversified across industries and locations.
Businesses come and go. Products become trendy one year and outdated the next. But Real Estate, whether someone is living in it, putting an ad on it, storing goods in it – It’s not going anywhere! We can be certain that as long as business is being conducted, real estate will need to be rented. Of course, the industry has changed over the years and we need to adapt to that change but there is no business that produces the kind of stable and consistent income like the real estate business!