Real estate investment trusts (REITs) allow individual investors to purchase shares in commercial real estate portfolios that generate income from the retail, health care, industrial and residential property sectors. Equity REITs trade on the stock exchange, which provides ample liquidity to buy and sell for income, capital growth or a mix of both.
REITs' exposure to the property market means they typically have a low correlation with other stocks and bonds, which can help diversify a portfolio. When considering an investment in this asset class, investors should be mindful that REITs pay the majority of income back to investors through dividends, so only a low amount of taxable income is reinvested. REITs may also incur high management and transaction fees.
Although a higher interest rate environment like we are in now can reduce corporate profit margins, it also indicates a growing economy that allows tenants to afford increased rents. "Over the past 25 years, the total return of REITs in rolling four-quarter periods was positive 87% of the time when interest rates were also rising," according to the National Association of Real Estate Investment Trusts (Nareit), as reported by Reuters.
Investors who want to add REITs to their portfolio should consider these three companies. Let's look at suitable entry points.
Realty Income, listed in 1994, aims to provide shareholders with dependable monthly income. The company generates cash flow from nearly 6,000 properties leased under long-term agreements to commercial tenants. As of Dec. 10, 2018, Realty Income stock has a market capitalization of $19.5 billion and known as the monthly dividend company, it pays investors a 4.13% forward dividend yield. It is up 6.2% over the past month while returning 19.48% year to date (YTD).
Like most REITs, Realty Income's share price started to trend higher from mid-February. After a minor period of consolidation throughout September and early October, the price continued upward to make a YTD high of $66.42 on Dec. 7. Momentum investors could take an entry on minor retracements to the $64 level, while investors who favor deeper pullbacks should seek to buy near $58, where price finds a confluence of support from an uptrend line dating back to April and horizontal line price action.
Ventas, with a $23.5 billion market cap, holds a diversified portfolio of more than 1,100 properties, which include medical offices, life science facilities, hospitals, rehabilitation centers and acute care facilities. The company owns 40 properties in Canada and the United Kingdom and continues to seek opportunities in countries with mature health care systems. Trading at $65.47, Ventas stock pays a forward yield of 4.98% and has returned nearly 10% over the past month, outperforming the REIT healthcare facilities industry average by 4.3% over the same period as of Dec. 10, 2018.
The Ventas share price tracked lower for the first three months of 2018 before commencing an uptrend in late April. The 200-day simple moving average (SMA) – used by investors to gauge the general market trend – has acted as significant support, with price bouncing off this popular technical indicator in July, September and October. Investors looking to join the short-term trend should look for dips back to the two-month uptrend line at $62. Alternatively, pullbacks to the $59 level provide a high-probability entry point – an area where price finds support from the August swing high.
Headquartered in Salt Lake City, Utah, Extra Space Storage owns and operates approximately 1,600 self-storage facilities in 39 states plus Washington, D.C. and Puerto Rico. In total, the company's properties comprise roughly 122 million square feet of rentable space used to store boats, recreational vehicles (RVs) and business equipment. Extra Space Storage pays a 3.7% forward yield and has a market cap of $13.04 billion. As of Dec. 10, 2018, the REIT has returned 10.24% over the past month while returning 15.72% YTD.
The share price of Extra Space Storage rallied from a low of $75.44 in February to $100.98 in June – a gain of almost 34%. Buyers lost interest between July and September before returning in October. Those who want to buy could look for an entry point at the $92 level, where the price should find support from an uptrend line. More conservative investors may wait for the price to break above the June swing high and enter on the first retest of that level.