There are more than 200 publicly traded real estate investment trusts (REITs). While that gives investors lots of variety, it can also make it hard to choose which ones best fit their portfolio.
To make it easier to narrow the list down, here's a look at three core REITs all investors need in their portfolio.
Invest in this mega-trend with real estate
REITs play a vital role in helping companies finance growth because they buy or develop the capital-intensive real estate that companies require, which frees up their capital for expanding core operations. One industry where REITs are playing a pivotal role is the technology sector. They own, operate, and develop critical infrastructure like data centers and communications towers. Given the rapid rise in data usage, real estate supporting this sector is in high demand.
Because of that, investors need a REIT focused on information technology in their portfolio. There are many excellent options, led by American Tower (NYSE: AMT), which has grown into the largest REIT. The global communications tower operator expects to continue expanding at a healthy clip for many more years, powered by mobile data growth. The company estimates it can grow its AFFO per share at a double-digit annual pace through at least 2027. That should support continued dividend growth, potentially giving American Tower the power to keep producing market-beating total returns.
A resilient real estate subgroup
Residential rental real estate deserves a place in any real estate portfolio. Rental properties tend to be relatively durable across economic cycles because people always need housing. While rental rates and occupancy levels do feel some pressure during tough times, they typically bounce back quickly during the subsequent recovery.
There are many excellent residential REITs worth buying. One of the leaders in this sector is AvalonBay Communities (NYSE: AVB). The company owns an interest in nearly 300 apartment communities containing over 86,000 apartment homes across 11 states, including 18 communities under development. The REIT owns a diversified portfolio of properties in many of the country's major metro areas. While many urban areas were under pressure due to the pandemic's impact on big cities, they should recover as vaccines roll out. Add that to AvalonBay's top-notch financial profile and active development program, and it's an excellent way to invest in multifamily housing over the long haul.
A back-door play on e-commerce
Another major trend in the real estate sector is the growth in industrial real estate driven by rising e-commerce sales. Many industrial REITs focus on these properties, giving investors lots of solid options. In addition to industrial REITs, diversified REIT W.P. Carey (NYSE: WPC) owns an extensive industrial real estate portfolio.
I think W.P. Carey is an excellent back-door way to play the growth in industrial real estate. It owns a sizable industrial portfolio, at 47% of its total. Further, it trades at a relatively cheaper value than most industrial REITs. Because of its lower valuation, W.P. Carey offers an above-average dividend that currently yields 5.8%. While it doesn't have the development upside of some industrial REITs (though it does invest in warehouse development projects), W.P. Carey has a long history of creating shareholder value, including increasing its dividend every year since going public. Meanwhile, it has a solid financial profile, giving it the flexibility to continue expanding its portfolio via acquisition.
Build a well-rounded real estate portfolio with these three REITs
Investors should have some exposure to information technology infrastructure, residential rental properties, and warehouses in their real estate portfolio, given the expected growth ahead for all three subgroups. While many solid REITs focus on each trend, American Tower, AvalonBay Communities, and W.P. Carey each stand out as ideal options. An investment in those three REITs, or similar ones, would enable an investor to build a well-rounded real estate portfolio that should generate attractive total returns over the long term.