The real estate sector experienced a rocky 2018, closing out the year in the red while managing to outperform the broader market.
The year started with sky-high home prices and historically low mortgage rates only to see these trends reversed. A spike in interest rates has deterred buyers, while prices for new and existing homes in major cities have fallen from peak levels. The impact of those two market forces has hurt the real estate sector, and in particular, the home builders, suppliers and real estate investment trusts (REITs).
The Real Estate Select Sector ETF (XLRE), fell 4% year-to-date (YTD) through Dec. 20, compared to S&P 500’s 7.4% decline.
Moving into 2019, as the decade-long expansion faces a period of heightened volatility and risk, the real estate sector stands to bear the brunt of uncertainty. Aaron Terrazas, director of economic research for Zillow, forecasts the 30-year, fixed mortgage rate to reach 5.8%, “territory not seen since the dark days of 2008,” per Forbes. On the brighter side, millennial demand for real estate should surge as the largest cohort of the group turns 29 next year.
Meanwhile, technological innovation will continue to rapidly transform the industry as iBuying, blockchain, artificial intelligence, and machine learning, and other emerging tech changes the ways that buyers, sellers, investors, and other players in real estate interact with each other and the properties they are interested in.
Here are the five real estate companies that have managed to outperform the rest, based on their stocks’ performance against the S&P 500 in 2018. This list only included companies with market caps of $1 billion or more and are including in the S&P 500.
1. American Tower Corp.
Market Cap: $72.5 billion
2018 Stock Performance: +15.4%
2. Realty Income Corp.
Market Cap: $19.2 billion
2018 Stock Performance: +14.3%
3. Welltower, Inc.
Market Cap: $26.9 billion
2018 Stock Performance: +12.5%
4. Extra Space Storage Inc.
Market Cap: $12.3 billion
2018 Stock Performance: +11.3%
5. HCP, Inc.
Market Cap: $13.8 billion
2018 Stock Performance: 10.9%
American Tower Corp.
American Tower Corp. (AMT), a global REIT company, saw its stock reach an all-time high in 2018, generating a 15.4% return in 2018. The $72.5 billion partnership owns thousands of broadcast sites around the world, which it leases out to mobile carriers. These recurring rental revenue streams have continued to boom on the popularity of next-gen smartphones, lifting American Tower’s profits and free cash flows. While the REIT units have delivered a total return, including distributions, of 550% over the past 10 years, the growth may still be in its early stages as wireless companies roll out 5G, per Income Investors. Carriers will need to spend billions to ramp up their networks for the next-gen wireless revolution, as it requires more broadcast sites in different locations, and with additional capacity.
“In addition to helping usher in the deployment of new spectrum, we anticipate that 5G is likely to open up a host of new business and consumer services, including a tremendous expansion in IoT functionality,” said American Tower's CEO James Taiclet during the Q3 earnings call.
While shares currently yield 2%, analysts project the payout to double over the next four to five years.
Realty Income Corp.
San Diego, Calif.-based Realty Income Corp. (O) invests in free-standing, single-tenant commercial properties in the United States and Puerto Rico. The firm owns roughly 5,500 properties in its portfolio rented to 257 different commercial tenants.
Investors like the fact that Realty Income is not a pure-play REIT, and is more diversified than some of its peers. About 20% of its portfolio consists of non-retail property types, including office and industrial properties, giving the firm additional opportunities to find value-adding acquisitions, per Motley Fool. Further, Realty Income estimates that 94% of its retail tenants are protected against e-commerce headwinds and recessions, with a significant portion comprised of drug stores and dollar stores. The $19.2 billion company saw its stock gain 14.3% in 2018.
Welltower Inc. (WELL) is a REIT focused on investments in senior housing, assisted living and memory care communities, post-acute care facilities and medical office buildings. The Toledo, OH-based healthcare REIT also owns hospitals and other healthcare properties outside of the U.S.
Welltower shares gained 12.5% in 2018, reflected in a market cap of $26.9 billion. The firm has seen cash flows and profits improve over the past couple years, in part thanks to new focus on patients with private insurance. Welltower managed to move 69% of its net operating income from private pay in 2010 to over 90% in 2018, while it sold off other properties including skilled nursing facilities, which typically house patients and residents without private coverage.
While the stock could suffer near-term volatility in light of more restructuring, long-term trends look to be on its side as the U.S. population ages. According to the U.S. Census bureau, the population of Americans over 85 is set to double over the next 20 years, a segment that spends roughly $35,000 annually on healthcare per person. Income-oriented investors may also find Welltower’s 4.8% dividend yield attractive.
Extra Space Storage Inc.
Extra Space Storage Inc. (EXR) is a Salt Lake City, Utah-based provider of self-storage units, with 1,483 facilities in 39 states, Washington, D.C. and Puerto Rico. The REIT, which is the second-largest operator of self-storage facilities in the U.S., has seen cash flows surge on its dominance in the breakout industry. While more tenants demand self-storage lockers for a monthly fee, the market remains difficult to break into, per Income Investors. Many cities maintain strict zoning regulations and high land prices that make it expensive to start new building projects. Meanwhile, high switching costs from one provider to another keep customers locked in, and offers Extra Space wiggle room for rent hikes.
While the average U.S. home size has tripled in the past half-century, consumers have more stuff than ever. Now, about 10% of people are renting off-site storage, with that number only expected to grow. This trend helped Extra Space’s same store sales jump 3.2% in 2017, while analysts are estimating cash flows to increase at a mid-single-digit rate over the next five years.
HCP Inc. (HCP) is a $13.8 billion healthcare REIT based out of Irvine, Calif. HCP owns properties divided among medical offices, life sciences and senior housing, generating income by leading out its properties to tenants or by partnering with operators like senior living facilities. The company grows by building new properties from the ground up, or acquiring existing locations.
Shares gained 10.9% in 2018, with bulls citing its well-diversified portfolio and its focus on private-pay healthcare tenants, which offer more predictable revenue streams than those reliant on government reimbursements. HCP is also set to benefit from an again population, as it plans to ramp up development efforts, while it faces risks such as industry oversupply and rising interest rates.