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Real estate investments trusts (REITs) have been hit hard over the last few months by the threat of rising rates. Investors are worried that as rates rise there will be a shift from REITs to fixed-income investments.
Worries about China’s stumbling economy has rattled many U.S. stocks — even those of companies that do no business in China, such as REITs. With all that, the Vanguard REIT Index ETF (NYSEArca: VNX) is down 10% year-to-date and is on track for its worst year for since 2008.
But as it stands now, it looks all but certain that the Federal Reserve won’t raise rates this week. Thus, the pain that REITs are feeling should subside a bit.
The beauty of REITs is that they are relatively insulated from the international turmoil. Owning buildings and real estate has little to do with a possible slowdown of the world’s second-largest economy.
But not all REITs are created equal, and there are pockets of value to be found in REITs. Case in point: Back in January we profiled the top 5 REITs for 2015, since then, four of those names have outperformed the Vanguard REIT Index on a total return basis.
So, I still believe there are certain REITs that could be worth owning, regardless of what the Fed does when it meets next week. Here are the best picks:
No. 1 REIT to Own Today: American Tower (NYSE: AMT)
American Tower’s 2% dividend yield might not seem like much, but the company is in a very steady business — the largest operators of wireless towers in North America. This gives it a steady stream of cash flow that’s backed by long-term contracts — generally 10 years or longer.
American Tower rents out space on its wireless towers to wireless carriers, where it can sell space to multiple carriers without any competitive-related issues.
Despite its steady market, American Tower shares are down more than 10% over the last month. American Tower should also be able to grow from the increase in wireless data usage. And it has a fairly wide economic moat; the capital outlay to build towers is high. Also, the switching costs for its customers are relatively high.
No. 2 REIT to Own Today: Simon Property Group (NYSE: SPG)
Simon Property offers a 3.5% dividend yield and is one of the largest owners of regional malls and outlet centers in the U.S. This REIT has fallen close to 7% over the last 30 days, but not much has changed in the company’s strategy.
It still has relationships with some of the largest retailers in the world and has streamlined its portfolio of assets over the last year. In 2014, it spun off its smaller and less-appealing properties, leaving it with a set of assets that have a higher occupancy rate and tenant sales per square foot than before.
Now, the big opportunity lies in opening more malls across the world, in areas like Asia and Europe. Simon Property has already started expanding, using local partners in foreign markets.
No. 3 REIT to Own Today: HCP Inc. (NYSE: HCP)
HCP owns various health-care facilities across the U.S. Its stock is down close to 15% year-to-date. It pays out a juicy 6.3% dividend yield.
The key tailwind for HCP is growth of an aging population, the boom of aging baby boomers if you will. As well, the Affordable Care Act will expand the number of insureds, ultimately expanding HCP’s potential customer base.
Now the real beauty of HCP’s business model is that its tenants operate in a non-discretionary market. For the majority of people, health-related spending isn’t a choice but a necessity. And health care will always require a physical space.
In the end, REITs still serve a purpose within investors’ portfolios regardless of what rates do. They offer the diversification of owning real estate, while also being insulated from economic turmoil. Let’s face it, even when things get tight you still have to pay your rent, right?
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