Real estate investment trusts (REITs) can be a tremendous way to gain access to institutional-quality real estate investments and grow an investment portfolio. Right now, a lot of REITs are suffering from loss in revenues as a result of COVID-19 and general uncertainty in the marketplace, which is pushing share prices down, making it a great time to invest in the right REITs.
While there are several great REITs to consider beyond this list, take a look and see why Public Storage (NYSE: PSA), AvalonBay (NYSE: AVB), and Innovative Industrial Properties (NYSE: IIPR), are 3 REITs you need in your real estate portfolio.
What to look for in a REIT
When it comes to buying REITs there are a number of factors that you should consider including:
- The quality of the assets and portfolio.
- The type of real estate.
- Supply and demand for that asset class in the given market.
- Company track record.
- Growth opportunities.
- Company financials, which includes revenues, expenses, cost of debt, amount of debt, dividend return, and payout ratio.
The retail, hotel, and office sectors have been through the wringer this year. Low share prices make some of them potential plays for achieving huge growth over the next year or two, but there is risk that comes with those assets. The pandemic is very much at large, and uncertainty over how it will continue to affect these sectors is still unknown.
Rather than focusing on potential growth opportunities or discounted buys, I'm going to focus on the REITs that have maintained a solid track record during these challenging times while still having room for growth in the future because of the quality of their portfolio and balance sheets and their asset class.
Public Storage is the largest self-storage REIT in the marketplace, owning or having interest in 2,738 in the United States and Europe. The company is facing setbacks from the current pandemic and oversaturation in the storage market in certain markets, which is pushing rental rates and occupancy levels down as a whole. Net income was down $60.3 million in the second quarter of 2020, and funds from operations (FFO) also dropped by 3.7% year to date when compared to the same period a year prior.
But despite these setbacks, the company still maintains a super strong portfolio with very little debt and a moderate payout ratio of 81%. This company has one of the highest ratings for a REIT, and for good reason. While the company may be suffering in the short term, their share prices don't reflect it. The company is close to rebounding to pre-coronavirus levels, undoubtedly because of their top-notch rating, strong track record, great balance sheet, and low debt.
AvalonBay is a residential REIT that specializes in high-end urban housing in top-tier cities across the USA. AvalonBay is the ninth-largest REIT and has been a popular residential REIT because of the quality of its assets, strong balance sheet, and stable dividend return. Currently, share prices are down over 30% from pre-coronavirus levels, despite a resilient and well-maintained portfolio over the past two quarters. The company achieved a 97% average rental collection rate for Q2 2020 and physical occupancy of 93.3%.
Revenues are down slightly, but not low enough to warrant the deep discount in value we're seeing today, which is why the company is planning to sell assets to buy back shares at this low price. Even with dips in revenues, the company still maintains a well-balanced payout ratio of 72% and 4.9x debt-to-EBITDA as of Q2 2020.
AvalonBay currently owns or manages 295 apartment communities with plans to expand beyond their current core markets, adding other top-tier markets like Denver and Southeast Florida to their development portfolio in the coming years. Right now investors can achieve a 4.2% return with a well-positioned company that has room to grow.
Innovative Industrial Properties
Before diving in, I want to disclose that I do own shares in this company and hope to own more. I was fortunate enough to have purchased shares early on and have seen prices grow over 300% since my initial purchase. While they may not be trading at super low prices we saw back in March of 2020 or a few years ago, I do think this company is a must for any real estate portfolio that has tremendous opportunity for continued growth over the next few years. Especially considering that five states currently have the legalization of marijuana for either recreational or medical use on the ballots for 2020.
Innovative Industrial Properties specializes in owning and leasing industrial real estate for medical marijuanna use and currently owns facilities in 16 of the 33 states in which medical marijuana is legalized. The company's track record since becoming public in 2016 is phenomenal. Q2 2020 alone saw revenues increase 183% from the previous year.
In Q3 of 2020 the company purchased a new property in Michigan with plans to develop a 63,000-square-foot facility to add to their already large portfolio of 4.7 million rentable square feet. Rent collection, occupancy, and revenues have remained strong during this volatile year, with 99.3% of their portfolio being leased as of Sept. 1, 2020. The company maintains a very healthy balance sheet with low debt and a lot of room to grow, not just in the existing marketplace but further as more states pass laws regarding medical marijuana use.
All three of these REITs are a great addition to an investment portfolio. Their strong financials, growth opportunities, and top-tier assets make them opportunistic buys but with relative safety.