Real estate investment trusts (REITs) are a unique asset class. Since they are required to pay 90% of their taxable earnings in the form of dividends, the shareholders benefit from directly pocketing the majority of these profits before they are taxed, rather than seeing them go towards executive bonuses and other undesirable and sometimes nefarious ways.
REITs are considered a good hedge against inflation, since landlords can usually raise rents as their costs increase, and REITs' prices typically don't fluctuate as much as most other stocks. Let's look at some of the safest REITs on the market. Keep in mind that there is a price to pay for such safety - generally, the safer the REIT the lower the yield.
Apartment REITs The rental housing market has been the main upside to the downturn in housing. Many people who lost their homes to foreclosure have been forced to the rental market, and others who are unable to get a mortgage are doing the same. Housing prices in some markets are still falling, which in turn has scared away a number of potential homebuyers for the time being. As such, apartment vacancies are down, rents are up and REITs are reaping the rewards.
AvalonBay Communities (AVB) owns and operates multi-family residential properties in various parts of the US, including some upscale apartments in the New York and Washington DC metro areas. The annual dividend of 2.9% does not sound stellar, but it has been consistent and is considered safe. In addition, the stock price has performed quite well in the past 12 months, giving investors a good overall return.
Essex Property Trust (ESS) owns and operates apartment properties primarily on the West Coast. This REIT exemplifies the slow and methodical approach to growth. Its current dividend yield of 3.2% will not give you an early retirement in Maui, but almost guarantees the peace of mind that comes with a safer investment for the long haul. The balance sheet looks solid and book value has grown steadily over time.
Other REITs Government Properties Income Trust (GOV) owns and leases office buildings that are primarily leased to government tenants. In fact, the majority of its rentable area is occupied by federal government agencies. GOV currently boasts a 96% lease-up rate and a solid dividend yield of 7.5%. At $22.45 a share this REIT is practically on sale after it dropped from the high $20s following the July secondary share offerings. But as I have always maintained, secondary offerings are not a reason to sell unless you don't trust the management or you disagree with the purpose behind raising additional capital. This REIT is as safe as it gets and the stock should see a nice boost between now and the next quarterly distribution coming up very soon.
Ventas Inc. (VTR) has a portfolio of senior housing and healthcare properties in the United States and Canada. It is also involved in management, leasing and marketing of hospitals in the US. This a rather large and more diversified REIT, with a stabilized yield of around 4.5%. Ventas recently acquired Nationwide Health Properties for $7.6B, which was a huge move creating one of the largest publicly-traded REITs in the market. Ventas' biggest competitor is
HCP, Inc. (HCP), but Ventas is the better bet in my opinion. In fact, it recently won a major legal battle against HCP and expects to receive hundreds of millions of dollars in punitive damages over the acquisition of a Canadian REIT in 2007. HCP is trading near the top of its 52-week range and may be a little more vulnerable to price declines than Ventas.