Most investors should keep things simple and focus on owning large, well-run companies. That logic is as true in the real estate investment trust (REIT) sector as in any other. Here are three industry-leading REITs that you need to keep on your wish list. Though they're rarely inexpensive, there is one that you'll likely find is worth adding to your portfolio right now.
1. Growing with the internet
Twenty years after the technology bubble burst, it's pretty obvious that the internet has, indeed, changed the world forever. But the changes the world is undergoing have not stopped, which is why Digital Realty Trust (NYSE: DLR) is such an important real estate investment trust to know about. The $40 billion market cap company owns 290 data centers serving more than 4,000 global customers.
The investment-grade-rated company is also one of the 10 largest publicly traded REITs. In addition to being large and diversified within its niche, it has increased its dividend annually for 14 consecutive years, showing a commitment to returning value to shareholders via dividends.
Size has its advantages as well, noting Digital Realty's successful history of expansion via acquisition. The bigger it gets, the larger the deals it can take on in an industry that continues to see strong demand.
That said, Digital Realty is rarely cheap. The current dividend yield is around 3.1%, which is toward the low end of its historical range. However, anyone who wants a piece of one of the most important REITs in the internet space should have this one on their wish list just in case there's a sell-off.
2. Moving things around
Next up is Prologis (NYSE: PLD), which is one of the world's largest providers of industrial properties. The company's core focus is warehouses, which sounds kind of boring, but it really isn't since this property type forms the backbone of global commerce. And Prologis is the 800-pound gorilla, with a market cap of nearly $90 billion and a portfolio of more than 1,600 properties spread across the globe.
Size, again, has its benefits. Only this time, it's related to offering customers a complete global solution to their warehouse needs. Moreover, with such a large portfolio generally concentrated in and around strategically important transportation hubs, the company can save on costs.
And then there's Prologis' long history of successful ground-up construction. The REIT reports having achieved 20% annualized returns over the past 19 years on $36.5 billion worth of capital investments. But here's the thing: It has enough land to support another $17 billion in construction.
Like Digital Realty, Prologis is rarely inexpensive. Today's roughly 2% dividend yield is near the lowest in the company's history. But if there's a sell-off in the market, this is a REIT you'll want to be watching so that you can directly tap into the ongoing globalization of the world.
3. Getting even bigger
We've had two wish-list names. Now it's time for a REIT that might find its way onto your buy list right now: Realty Income (NYSE: O). This REIT owns a portfolio of roughly 6,600 net lease properties. These are single-tenant assets for which the tenant is responsible for most of the operating costs. It's a fairly low-risk investment approach, leaving Realty Income to -- simplifying things a great deal -- sit back and collect the rent. With a $25 billion market cap, it's one of the biggest names in the sector.
But Realty Income just inked a deal to buy competitor VEREIT, which will take its portfolio up to 10,300 properties. That will make it the biggest player in the net lease space by a pretty generous margin. This is a fairly solid deal, too, with Realty Income expecting it to be 10% accretive to adjusted funds from operations (FFO) from the get-go and offering ongoing savings as VEREIT debt rolls over and gets refinanced at Realty Income's lower rates.
Perhaps more important, though, is that the purchase also positions the REIT to take on larger deals that competitors couldn't even consider.
Realty Income's dividend yield is around 4.2% right now, which is middle-of-the-road compared over the past decade. So it isn't cheap, but it also isn't expensive. However, when you consider the value-enhancing deal it is soon to consummate, it looks pretty attractive. And it's a Dividend Aristocrat, with over 25 consecutive years of annual dividend increases under its belt. Paying a fair price for a great company that's on the doorstep of getting even better will probably be worth it for most investors.
Preparing to act
Must-own companies don't trade cheaply very often, which is why you should have a shortlist of names that you want to own. History suggests that the market will, eventually, give you an opportunity to buy at a fair price. That appears to be the case today with Realty Income, one of the best net lease REITs you'll find. Digital Realty and Prologis, meanwhile, are two names to keep monitoring for the next pullback. It will be worth the wait to own two of the biggest and best REITs around.