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Intro

Investing in real estate is a great way to invest money for a number of compelling reasons, including value appreciation, leverage, positive cash flow, and tax benefits.  What's even more compelling about real estate investment trusts (REITs), in particular, is the fact that they essentially function as a more passive investment option.

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The structure of REITs is similar to a mutual fund. The REIT sells shares to the public and, in turn, uses the investment capital raised to invest in a portfolio of real estate properties, real estate mortgages, or both.  In contrast to making real estate investments directly, REITs are professionally managed by a fund manager.  

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So, investing in REITs affords you the ability to invest in solid real estate opportunities without the headache of having to identify, buy and sell, or manage any properties. Just identify and invest in great REITs!

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Benefits of REITs as Investments

Investing in REITs affords investors a number of added benefits.  Besides having a professional managing a portfolio of real estate on your behalf as a passive investment, REITs have also generated very competitive returns, on average. According to Green Street Advisors, REITs have generated returns on average of 10%+ per year over the last 10, 20, and 30 years. They also offer built-in diversification and are more cost-efficient than direct real estate investments.  

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You can either do the upfront research yourself and choose individual REITs, with many REITs having a particular focus, or you can invest in a REIT that already owns a diverse portfolio.  REITs are available that cover a broad array of property types.  They trade like stocks and they typically pay nice dividends, so solid REIT opportunities potentially afford both income and appreciation in the value of your shares.

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REITs are also far more liquid than private real estate investments. If you buy an apartment building or an office building as an investment and subsequently change your mind, it might take months or years to resell it!  But with an REIT, you can essentially cash out of the investment on any given day that the market is open.  One drawback, however, is that cash dividends from REITs are treated as ordinary income, so they are therefore subject to normal tax rates.

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4 Excellent REITs

REITs are traded on the market just like stocks.  Instead of focusing on net income or earnings within your financial analysis, however, a better metric to assess the profitability of REITs is FFO (funds from operations).  

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The FFO metric makes some adjustments to earnings to give more clarity on profitability.  FFO is usually included in the main profile of a given REIT.  Similarly, the P/FFO (or Price-to-FFO) is commonly used to assess whether a REIT is relatively cheap or expensive compared to its peers.

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The 4 REITs detailed below all have a number of things playing in their favor, including low Debt-to EBITDA ratios, relatively low P-to-FFO ratios, and nice dividend yields.

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1. Hannon Armstrong Sustainable Infrastructure Capital (HASI) - Hannon Armstrong is a green energy company dedicated solely to investments in green energy renewable structures.  It's got over $9B in assets and an S&P credit rating of BB+ (investment grade).  It's got a nice 4.53% dividend yield from a company that's growing earnings at 10% to 13% over time. The stock is down more than -40% in the past year. But the future outlook is strong with solid growth prospects relative to both earnings and dividends according to Bank of America and Bloomberg.  So now is a really good time to buy-in.

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2. Gaming and Leisure Properties Inc. (GLPI) -  GLPI has a triple-net lease business model that helps to insulate it from looming economic uncertainty. It focuses on leasing properties to gaming operators and gets more than 85% of its rents from prominent gaming companies including Caesars, Bally's, and Boyd Gaming.  Its long-term lease agreements provide stability and visibility.  Analysts have a consensus "buy" with expectations of 8.8% FFO growth next year. They're also projecting an upward tick in per share price that could provide a total return of about 15% including dividends.  It appears to be attractive at the current price for high income and growth.

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3. National Retail Properties Inc. (NNN) - National Retail Properties is another triple-net lease REIT, with lengthy lease terms of 10-15 years that include contractual annual rent increases. Its characteristics include low operating expenses, low capital expenses, and high free cash flow margins.  The REIT is diversified across more than 3,000 properties in 48 states and FFO has compounded at a solid growth rate of 4.3% CAGR since 2016. Dividends have grown for 33 consecutive years.

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4. Medical Properties Trust Inc. (MPW) - the per share stock price is down -45% in the past year, so it's an opportune time to potentially buy-in.  The dividend yield of 9.79% is very high, affording a nice income stream.  It's got 434 properties across 30 different states and 10 countries, with more than 90% of its current leases not set to expire until after 2031.  Such a relatively low P/FFO ratio provides a solid margin of safety too, although analysts' consensus is a "buy" with the stock price projected to rise to $20 in the next year or two.

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Conclusion

When it comes to investing money, it is hard to beat an annual average ~10%+ compounded return over 20 to 30 years with such a low-risk profile and only about 20% leverage.  REITs are a great way for investors to profit from real estate without all of the hassles of directly managing properties.  

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Moreover, while the private real estate is almost always fairly valued, the fact that REITs trade like stocks can lead to opportunities for value plays.  The four REITs highlighted above are solid options as part of a real estate investment strategy. I expect them all to continue growing and providing passive income streams to investors for many years to come alongside double-digit annualized total returns.

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Disclosure/Disclaimer

The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.