Residential home values have been on fire over the last year. According to the S&P CoreLogic Case-Shiller Index, home prices soared 11.2% in January, the largest annual gain since before the financial crisis.
There’s a myriad of factors pushing prices up, most notably a lack of supply, increased bullishness around strong post-pandemic economic activity, and forecasts of moderate inflation.
Investors are increasingly looking to the harder-hit commercial real estate sector, as tangible assets like land and buildings traditionally outperform in these economic environments.
While interest rates are rising in anticipation of growth, it’s important to note levels are still historically low, with the 10-year yielding only 1.7%. High-quality yield remains elusive, and even junk bonds are yielding less than 4.5%!
The combination of 4% yield with the prospect of asset growth makes REITs like CareTrust REIT (NYSE: CTRE), Stag Industrial (NYSE: STAG), and Realty Income (NYSE: O) top picks.
CareTrust REIT is a healthcare-based real estate investment trust (REIT) that owns nearly 200 net-leased healthcare and senior housing properties across 24 states. The REIT was a spin-off from senior living and skilled nursing company Ensign Group, which remains their biggest tenant.
In addition to the strong relationship with its tenants, CareTrust has a deep knowledge in all facets of this industry and one of the strongest balance sheets in the sector. These three factors were on display during the pandemic.
Despite the harsh backdrop for senior facilities during the pandemic, CareTrust was able to navigate virtually unscathed, collecting 99.3% of contracted rents in 2020. This allowed CareTrust to maintain its payouts while other senior-based REITs, namely Welltower (NYSE: WELL), had to cut dividends.
Not only did CareTrust maintain its dividend, but the REIT was also opportunistic during this period. CareTrust was heavily in investment mode during the pandemic, acquiring $105.2 million in assets that have an effective 8.9% yield.
This allowed the company to declare a quarterly dividend payout $0.265 per share, an increase of 6% over the prior year. CareTrust issued annual guidance for 2021 and expects normalized funds from operations (FFO) of $1.41 at the midpoint, pointing to a conservative payout ratio of 75%.
With a market capitalization of $2.3 billion, CareTrust is the smallest of these three companies but is well situated for decades of gains as the graying of America increases demand for senior living and skilled nursing facilities.
Stag Industrial is a pure-play industrial REIT that owns nearly 100 million square feet across 492 buildings. Shares have gone up more than 70% over the last five years as long-term investors learn more about the company and its innovative approach to capital management, which includes monthly dividend payouts.
Stag has been able to grow its dividend every year since going public in 2011, owing to its strong capital allocation policies. The company knows how to manage risk by taking a diversified approach. Geographically, Stag is in 39 states as of December 2020.
Despite being known as an ecommerce-focused REIT, mostly on account high-profile Amazon (NASDAQ: AMZN) is its biggest single tenant, with 3.8% revenue, the company is well diversified. Its top 20 tenants only comprise 19.5% of its total revenue.
Finally, Stag Industrial is well diversified, with tenants across a range of industries and its largest -- auto components -- comprising only 12.4% of total revenue. The company’s strong risk management led to an occupancy rate of 97.2% in 2020. Stag’s stock currently yields 4.2%, which is an annual per-share payout of $1.45.
Look for that to continue. Management estimates FFO will easily support the payout, with midpoint guidance of $1.97 per share. Stag Industrial will benefit from increased economic activity from the reopening of America and has the long-term driver of ecommerce growth.
Not to be outdone by Stag Industrial, Realty Income is the original monthly-paying REIT. Realty Income’s board of directors declared a quarterly dividend increase in March, its 110th since going public in 1994. The company has paid monthly dividends for 609 consecutive months, a period that extends beyond its time as a publicly traded company. On a go-forward basis, shares currently yield 4.3%.
The company’s record of success allows it to partner with strong tenants with a history of paying rent on time. Its top five tenants -- Walgreens (NASDAQ: WBA), 7-Eleven, Dollar General (NYSE: DG), FedEx (NYSE:FDX), and Dollar Tree (NASDAQ: DLTR)/Family Dollar (NYSE: DG) -- accounted for nearly 22% of its annualized contractual rental revenue.
The pandemic did lead to lower occupancy rates in 2020 across its 6,500-plus commercial properties, specifically in its retail property segment, but only narrowly (98.6% versus 97.9%), due to its strong partnerships with high-quality tenants.
Realty Income currently pays investors $2.82 per share every year, which is a manageable 81% of the adjusted FFO per share for the year. Investors can look forward to more quarterly increases and monthly payments from this Dividend Aristocrat.