It's a new year and time to consider some new approaches, or at least some minor revisions, to your investment strategy. Real estate investment trusts (REITs), with their mandated payouts, are a good way to mix growth and income into your thinking.
REITs cover the gamut of economic activity in the United States, including markets and business sectors. There's a lot to choose from, and we're here to help. Let's look at three REITs with very different strategies that may serve them, and you, well in the year ahead.
They are Alexandria Real Estate Equities (NYSE: ARE) for life sciences exposure, City Office REIT (NYSE: CIO) for traditional office space exposure in promising markets, and Annaly Capital Management (NYSE: NLY) for mortgage-backed income of the high-yielding variety. Here's more on each.
Alexandria Real Estate Equities
A focus on life sciences -- including the stuff so critical to keeping us alive nowadays -- is just one compelling aspect of the profitable portfolio held by this Pasadena, California-based REIT. The company also has a long record of rewarding investors.
Alexandria is a pioneer in collaborative life science, technology, and ag-tech campuses and now has 31.2 million square feet of rentable space in key markets such as Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and North Carolina's Research Triangle.
"We believe our unique business model and diligent underwriting ensure a high-quality and diverse tenant base that results in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value," the company says of itself.
The numbers, meanwhile, speak for themselves. This office REIT just paid a quarterly dividend of $1.09 per share on Dec. 30, building on a record of steady growth since the $0.13 it first paid in July 1997. Alexandria also posted net income of $324.2 million in the first nine months of the year, while many REITs were struggling, more than doubling the $150.4 million reported in the first three quarters of 2019.
While the yield was a modest 2.45% as of the Jan. 4 closing price of $170.90, that looks like a reliable payout with room to grow, in dividends and stock price. After all, Alexandria has about 16.2 million square feet in various stages of development and specializes in office space that's not easy to replicate at home.
City Office REIT
City Office REIT has an interesting niche: acquiring and operating high-quality office properties in "18-hour cities" in the South and Western United States. Those are cities with lower costs of living and doing business than our largest markets but still offer favorable economic growth trends (including office space and rents), a diverse employment base, and a large government and university presence.
In City Office's case, that's 65 buildings with about 5.8 million square feet of net rentable area in and around Dallas, Denver, Phoenix, San Diego, Seattle, Portland, Oregon, and Tampa and Orlando, Florida.
A smallish REIT with a market cap of about $420 million, City Office was paying a nice yield of 6.14% based on its Jan. 4 closing price of $9.02 -- down from a 52-week high of $14.16 -- and a dividend of $0.15 per share it declared on Dec. 15. That was the fourth-straight quarter for that payout after cutting it from $0.235 per share in April 2020, a level it paid at every quarter since October 2014.
That dividend appears comfortably covered by core FFO of $0.35 per share in the third quarter of 2020, a nice jump from the $0.29 per share of the year-ago frame. Occupancy edged up, too, from 91.2% to 93.1% in the year-ago period, and its weighted average lease remaining of 4.3 years means some stability for that critical flow of rental revenue.
City Office is now planning to expand into what some might call Zoom (NASDAQ: ZM) towns: the submarkets around its core markets that offer suburban and exurban living options for the occupants of its properties, with a focus on properties valued at $25 million to $100 million. Its managers might well find some bargains in that price range they can leverage to boost future growth and payouts in these stable, growing markets.
Annaly Capital Management
Annaly Capital Management is the yield play in this trio, paying 11.06% in 12-month dividend yield as of Jan. 5. This mortgage REIT paid a dividend of $0.22 per share on Dec. 10, the third consecutive quarter for that amount, and Annaly has yielded more than 10% per year since 2012.
This is a big REIT -- with $14 billion in permanent capital and about $103 billion in total assets -- and it's been around for more than 20 years, executing on a diversified investment strategy that uses agency mortgage-backed securities, residential and commercial real estate, and middle-market lending.
Annaly uses short-term borrowings to invest in mortgage-backed securities, especially from Fannie Mae (OTCMKTS: FNMA) or Freddie Mac (OTCMKTS: FMCC), as well as nonagency residential credit. Annaly also does commercial real estate and middle-market lending to private equity-backed businesses.
Annaly stock has been on a roller-coaster ride, closing at $8.23 on Jan. 4 after falling from a 52-week high of $10.50 a share to as low as $3.51. But the company's focus on structuring its holdings to deal with different market cycles has resulted in it leading the S&P 500 in total return by over 1.5 times since it went public in 1997.
The Millionacres bottom line
Each of these three REITs has its own individual cases for being promising investments in 2021. And each carries its own risks. For instance, rising interest rates would be more challenging, it would seem, to Annaly Capital Management, but a lingering recession that inhibits growth in office space use could dampen profits at City Office. It's hard to see what could go wrong for Alexandria Real Estate Equities, at least in terms of the space it occupies, but unexpected events have a way of changing everything, don't they?