The real estate investment trust (REIT) sector rallied 19.9% in the first six months of 2021, using Vanguard Real Estate Index ETF (NYSEMKT: VNQ) as a proxy, easily besting the 14.5% gain of the S&P 500 Index. While this certainly represents a bounceback after a tough 2020, it's growing increasingly difficult to find compelling investment opportunities in the REIT sector. But don't despair! There are still some REITs worth buying. Here are some names to consider today.
1. Bigger is better
Net lease giant Realty Income (NYSE: O) is rarely inexpensive, but today, its 4.2% dividend yield is hovering around mid-range over the past decade's yields. So, in some ways, it looks fairly valued. However, there's a big change taking place that should make this REIT very interesting to conservative investors: The company is buying peer VEREIT (NYSE: VER).
That purchase will take its portfolio from a massive 6,600 or so properties to an even more impressive 10,300 -- converting it from an 800-pound gorilla into, well, King Kong. And with scale comes great material advantages.
For starters, Realty Income believes this transaction will be 10% accretive from the get-go, as it leverages employees over a larger portfolio (few REITs could have taken on a deal like this). However, Realty Income will also gain residual benefits as VEREIT debt, which carries higher interest rates, rolls over and is refinanced at Realty Income's lower rates.
What's more, as an even larger company, it will be able to take on future deals its smaller peers probably couldn't even consider. In other words, this looks like a sea change of sorts for Realty Income. While not cheap, for conservative income-focused investors, this REIT still looks like an interesting option.
2. Demand will explode
Omega Healthcare Investors (NYSE: OHI) offers a huge 7.3% yield at a time when the average REIT yields a stingy 2.1%. Why such a massive difference? Omega owns nursing homes and other senior housing assets. In 2020, these types of facilities were dealt a hard blow by the coronavirus pandemic, as move-outs (this polite term includes deaths) increased, move-ins declined, and costs rose.
Thus, it's no surprise investors were and still are concerned Omega's lessees will be unable to make their rents. The REIT's yield is leaning toward the high side of its historical range, which is a real concern, since government assistance played such a big role in the portfolio's resilient performance last year.
Clearly, there are notable near-term risks here. However, the long-term outlook is pretty solid, as baby boomers are retiring in droves and will continue to do so for decades to come, bolstering demand for Omega's senior housing. In fact, given the current state of the industry, the REIT thinks demand may outstrip supply by the end of this decade. If you believe that demographics are destiny, Omega is a high-yield name you might want to examine more closely today.
3. The digital future
CoreSite Realty (NYSE: COR) offers a 3.7% yield, notably higher than its closest peers in the data center property niche. Indeed, this is something of a relative value play, given the strong long-term prospects for future data center growth. And it's worth noting that peer QTS Realty (NYSE: QTS) just recently agreed to be bought out by Blackstone at a 21% premium.
CoreSite and QTS are both relatively small players in the data center space, so an acquisition isn't out of the cards for CoreSite. However, the real reason to highlight the QTS deal is that it highlights the sector's importance to savvy investors.
Meanwhile, as it stands, CoreSite has notable growth prospects built into its portfolio as it fills available capacity and develops new capacity. All in all, in the data center space, CoreSite still looks like it's a relative bargain for investors interested in a growing property niche.
4. The mall is far from dead
There's a saying among dividend investors: The safest dividend is the one that's just been raised. While that's probably hyperbole, there's a grain of truth in there just the same.
Giant mall landlord Simon Property Group (NYSE: SPG) just increased its dividend by 7.7% in June. Sure, it also cut its dividend by 38% in 2020, thanks to the pandemic effectively shutting down most of its properties. However, the increase serves as management's assurance that the REIT is likely past the worst of the hit. Notably, Simon also increased its full-year guidance when it reported first-quarter earnings.
So, with what looks to be an improving backdrop, there is still more to like here. For one, Simon's portfolio of more than 200 enclosed malls and factory outlet centers makes it one of the largest players in its industry. Generally, its properties are highly productive and located near population-dense, affluent areas, making them desirable to both customers and retailers.
Furthermore, the REIT has an investment-grade rated balance sheet with ample liquidity to ride out the current headwinds it's facing. On top of all that, management actually used the economic downturn to improve its business by investing in retailers and buying a peer, striving to emerge an even stronger competitor on the other side.
While Simon's shares have rebounded dramatically in 2021, they are still around 40% below where they were roughly five years ago. However, if you believe the mall still has some life left, Simon is probably the best way to play the space.
Ups and downs
It's impossible to predict the future directions of the market or the REIT sector, but investors have clearly taken a shine to REITs in 2021. That said, if you pick carefully, you can still find compelling investment opportunities in the REIT space -- despite the rally of the first half of 2021 -- including Realty Income, Omega Healthcare Investors, CoreSite Realty, and Simon Property Group. You just have to look past the big picture and start paying attention to the details and stories behind the individual companies you are exploring.