To say that this year has been a challenging one for real estate investment trust (REIT) investors would be an understatement. Dozens of REITs slashed or suspended their dividends in response to deteriorating rental market conditions as COVID-19 ravished the economy. Even seemingly safe dividends went down as REITs took extra precautions, given the uncertainties of when market conditions might improve.
However, several REIT dividends have stood firm during these turbulent times, thanks to the support of their top-tier balance sheets. Among that elite group are Camden Property (NYSE: CPT), Prologis (NYSE: PLD), and Public Storage (NYSE: PSA). That makes them excellent buys right now for investors looking for a safe REIT amid the sector's current storm.
Camden Property: A cut above its peers
Camden Property is in a three-way tie with AvalonBay Communities (NYSE: AVB) and Equity Residential (NYSE: EQR) for having the highest credit rating among multifamily REITs. While their A-rated credit puts all three in the safe zone, Camden stands a little bit above those two. First, it has a slightly lower leverage ratio (4.6 times net debt-to-EBITDA versus 4.9 times at AvalonBay and 5.1 times at Equity Residential). That gives it more cushion during the current downturn.
Second, the company's portfolio has a bit more geographic diversity. AvalonBay and Equity Residential have portfolios concentrated in major U.S. gateway cities. While these markets traditionally benefit from higher rental growth rates, they're currently facing more COVID-19 headwinds than other regions. Many large technology companies are allowing their employees to work from home for extended periods, which is leading them to flee big cities for cheaper areas.
Equity Residential's CEO, Mark Parrell, commented on this impact in the second quarter. He noted that while "we see good demand for our apartments, both urban and suburban," there is "increased customer price sensitivity, especially in the urban cores of New York, San Francisco, and Boston."
While those price sensitivity issues are having some effect on Equity Residential and AvalonBay, they won't impact Camden since it doesn't operate in those regions. Those two factors make its 3.6%-yielding dividend one of the safest in the REIT sector.
Prologis: Strength amid the storm
Industrial REIT Prologis also has an A-rated balance sheet, which it backs with a low leverage ratio. It complements that with a conservative dividend payout ratio, and is on track to generate $1 billion in free cash this year after covering its 2.2%-yielding payout. Those factors not only make its payout one of the safest among REITs but also gives it lots of financial flexibility to expand its operations.
Another factor that bolsters this REIT's safety is its portfolio focus on owning logistics facilities geared toward supporting the fast-paced growth in e-commerce. Because of that, its properties remain in high demand, which allowed rent collection to remain high during the turbulent second quarter. The company also experienced an uptick in customer demand for new space, giving it enough confidence to increase its full-year guidance. That strength amid this year's stormy conditions in the real estate market speaks to this REIT's overall safety.
Public Storage: A fortress-like financial profile
Self-storage REIT Public Storage also has A-rated credit, which it backs with top-notch financial metrics. The REIT has a leverage ratio of right around 1.0 times net debt-to-EBITDA, which is one of the lowest in the REIT sector. It also had $1.27 billion in cash and equivalents at the end of the second quarter, some of which it had earmarked to retire a portion of its higher-cost preferred shares.
That top-tier financial profile gives the REIT plenty of cushion to navigate through the current challenges facing the self-storage sector, which has been facing headwinds from oversupply and COVID-19. While both issues will likely continue to plague it this year, they should fade in 2021. Because of these factors, the REIT's 3.7% dividend looks to be among the safest in the sector.
Built for times like these
These REITs have some of the best balance sheets in the industry. On top of that, they operate in areas or sectors facing fewer impacts from COVID-19 or where current challenges should fade faster than in other REIT subgroups. Because of that, they're among the safest in the sector, which makes them great options for investors seeking a low-risk REIT to buy these days.