Real estate investment trusts (REITs) are often viewed as an attractive and seemingly safe way for investors to participate in the real estate market. Many REITs provide high dividend payouts and diversification for an investment portfolio. But during times of economic trouble, certain REITs can take a hit, making what was once a safe investment into a risky one.
Safety is always relative, but there are certain metrics investors can use to help identify which REITs are in the safest position to survive and thrive in the current market as well as maintain a positive outlook for what's ahead.
Let's take a look what safety indicators investors should look for in a REIT and the three safest REITs to buy right now.
How to know if a REIT is safe
While these are only a few important metrics to take into consideration, they are dominant indicators to a REITs safety in the long haul.
Debt to earnings (EBITDA): How much debt a company carries weighs heavily on its profitability, ability to pay shareholders dividends, and the overall success of a company in the long run. If the company takes on too much debt or has high interest associated with its debt, tables can turn quickly when the economy takes a turn. It's suggested to look for REITs with debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) less than 6x.
Payout ratios: REITs have much higher payout ratios than traditional stocks, as much as 90%. While it may seem high, anything below 100% is typically viewed as safe. Payout ratios in the 60%–80% range are a sweet spot for investors seeking safety but still desiring a decent return.
Quality of assets under management: A big factor investors shouldn't overlook, especially if they're seeking safety in their REIT investments, is the quality of the assets under management and the credit rating of the REIT. This includes the real estate markets the assets are located in, the type or quality of tenants, and the asset class in general. Demand drives everything, if the investments are in oversaturated markets or markets with little to no demand to support it, it's unlikely they'll be successful in the long haul. Additionally, certain sectors are in high demand with no inkling for the demand to dry up anytime soon.
Safe REITS to buy right now
With that being said, let's take a look at why Equity Residential (NYSE: EQR), Prologis (NYSE: PLD), and American Tower Corporation (NYSE: AMT) stand out right now as three of the safest REITs to buy right now.
Equity Residential specializes in urban, high-density residential communities in markets like New York City, Boston, Seattle, and Washington D.C. They continued to make the top of the list for one of the safest REIT investments because of their top notch A-credit rate and solid financials, even despite COVID-19 challenges. Their latest Q2 2020 earnings release showed the company achieved an average of a 97% collection rate for the quarter, with a 7.5% increase in funds from operations (FFO) from the same quarter the previous year.
The company has a healthy debt-to-EBITDA ratio of 4.82x and $187 million in cash on hand, meaning liquidity isn't a huge concern for the company if the economy continues to shift. Its fairly conservative payout ratio of 66% means the company has a lot of financial give and its 4.5% dividend yield means there's decent return that's backed with a significant amount of safety.
Prologis is arguably the top industrial REIT, with over 963 million square feet of logistics facilities in 19 countries that supply business-to-business and retail/online fulfillment with a whopping $136B under management. The company's track record and A-credit rating is hard to compete with, and considering the industrial space and demand for fulfilment centers is at all-time highs, revenues and growth for the company are soaring.
The company's Q2 2020 earnings release found a 22% net rent increase and 95.7% occupancy. The company's financials are strong, with $4.6 billion in liquidity, a debt-to-adjusted EBITDA of 4.17x for quarter end, and an average of 2.3% cost of debt for an average period of 9.1 years. Its payout ratio is currently 52%, which is very conservative given the financial health of the company.
Prologis wasn't immune to the sharp declines in values the stock market saw in March, but the stock price has rebounded beyond previous 2020 highs, to $102.64 per share at the time of this writing, making the dividend return just over 2%. Its lower yields are made up for by the safety of the company.
American Tower Corporation
American Tower Corporation is the largest publicly traded REIT with annual revenues pushing $1.9 billion. The company leases space from wireless and broadcast towers across the globe, with 181,000 communications sites in its portfolio. Unlike many other REIT sectors, wireless and broadcast communications saw increase in revenues and net operating income as a result of the Coronavirus pandemic, reporting a 1.2% increase in revenues, 3.2% increase in net income, and 20% increase in dividends when compared to the same quarter in the previous year, while adding 500 towers to its international markets in Q2 2020.
As of June 30 2020, the company had a very conservative payout ratio of 53% and $6.5 billion of total liquidity. Additionally, its low leverage ratio of 4.8x for debt to EBITDA means the company is well-positioned financially. Being the largest REIT and having such a strong track record does come at a price. Currently, dividend returns are low, under 2%, making this a tough buy for those looking for both safety and higher dividend returns. However, its massive global reach and super strong financial makes it a great fit for those looking for safety in a high- demand and growing REIT sector.
These are by far not the only worthwhile or safe REITs to invest in, but they do have solid financials to back the claim for safest REITs in the market today.