10 Top REITs For Dividend Investors

If you know our work, you know we don’t buy into hype or panic. When it comes to equity REITs, our price targets are far less volatile than market prices. We’re looking at the fundamentals and projecting the most likely future.

To be clear, this list absolutely won’t be focused on picking REITs with big dividend yields today. We didn’t call it “Top 10 for sucker yield buyers.” We’re picking REITs with strong dividend coverage, respectable or great growth in AFFO per share, and a beatdown share price.

Apartment REITs

It’s time to consider apartment REITs attractive. Which apartment REITs are attractive? I like all of the six we cover.

• AvalonBay Communities (AVB)
• Equity Residential (EQR)
• Camden Property Trust (CPT)
• Essex Property Trust (ESS)
• Mid-America Apartment Communities (MAA)
• UDR, Inc. (UDR)

We’re currently bullish on all six of them.

All six trade at forward AFFO multiples below 19x and all six have price-to-NAV ratios (using consensus NAV from early January) below .87.

Of course, some trade at larger discounts to our targets than others. However, we think the apartment REITs will recover from the current downturn.

Prior Opportunity

In October 2020, we wrote a huge sector update on the housing REITs.

In that article, we said:

Excellent value remains in this sector. One way to see that value is by using the implied cap rates on the REITs. While there should be some near-term headwinds, we can afford to wait. Management is still solid. The balance sheet is still strong. Vaccine progress continues. The pandemic is still grabbing headlines today, but will it get headlines a year from now? How about two years from now? That seems unlikely. Two years from now some investors will remember this as the period that enabled them to lock in a low cost basis on apartment REITs.

We also used one of my favorite comparisons for equity REIT prices:

Remember that even if the REITs lost 35% of revenue for two years, the total cash value of all missing revenue would be less than 10% of current share prices. We previously demonstrated that EQR would normally expect around $7/share in revenue for a year. Losing 35% for two years would be about $4.9 per share in total across the two years. Shares of EQR declined from about $87 just prior to the pandemic (February 21st, 2020) to $50.90 as of today (9/29/2020 before the market closes). That’s a decline of about $36, or about 5 times normal levels of revenue per share.

At the time, many investors said apartment REITs were uninvestable because of the pandemic, because of laws preventing evictions, and because of Black Lives Matter. We argued that the decline in share prices was dramatically larger than any potential future revenue loss.

That math still works.

However, we weren’t stuck in a bullish view. After prices ripped dramatically higher, we took a far less optimistic tone.

When Prices Were Too High

In early April 2022, our Portfolio Update (subscriber article) described our apartment REIT positions by saying:

Higher interest rates are favorable for FFO growth, but historically we’ve seen apartment REITs occasionally correlate with bonds. They shouldn’t, but it has happened at times. Not much to say here. Great REITs, solid dividends, but I’m not loving the valuation.

It may seem strange that higher interest rates would be positive for FFO growth, but the apartment REITs had minimal exposure to near-term maturities and/or floating rate debt. Consequently, it wouldn’t be a big headwind for expenses.

On the other hand, it drove up the cost of home ownership which is favorable for apartment demand. That was a factor that could help to offset the rapid growth of supply in apartments from construction projects that started when interest rates were much lower.

We’ve reached the point where interest rates are a threat to the economy, which is not favorable for FFO growth. However, the change in market prices is large enough to more than reflect the risks today.

In the Portfolio Update from April 2022, we had no problem highlighting that some of our positions were overpriced:

Am I being clear enough that the prices and ratings shown there are from April 2022? I just want to make sure investors don’t confuse today with April 2022. This is January 2023 and share prices are dramatically different.

We didn’t feel compelled to remain bullish. However, we intended to keep those positions as long-term allocations, so we didn’t close them out. We had already reduced our apartment REIT positions some during 2021:

We dumped all our shares of EQR above $82, a significant chunk of ESS over $324, and a chunk of AVB over $225. I didn’t get to sell at the very top, but it was still a good choice.

I bought 85 shares of ESS in late 2022 at prices from $208.60 to $212.44. That was much lower than the $324 sale price from late 2021.

The objective here is to trade on fundamentals rather than getting wrapped up in the market’s excitement. We correctly predicted that multiples would plunge as growth in AFFO per share fell. We knew growth in AFFO per share would fall because year-over-year leasing spreads were too high to last.

I didn’t think shares would get this cheap again, but here we are.

The Apartment REIT Thesis

Shares trade at unusually low multiples of AFFO per share and larger discounts to NAV per share. Those NAV per share estimates will probably trend down modestly over the coming months, but not enough to catch up with the current prices.

As it stands, the REITs are finally offering an attractive bargain again. Yes, rental growth rates plunged (as we predicted well in advance). There’s even a chance they might turn negative. However, share prices are down dramatically.

Using EQR as an example:

• Shares cost $60.97 today (written over the weekend).
• Down over $21.00 from our sale price in July 2021.
• That $21.00 per share is similar to about three years of gross revenue.
• The $21.00 per share is more than six years of AFFO.

Are prospects for EQR bad enough to merit such a wild swing? No.

Note: It took a bit to publish this article. At $61.62 today, EQR only rallied about 1%. That is a pretty minimal impact on the thesis.

The same logic holds for each of the apartment REITs. The decline in share prices was enough to more than offset expectations for lower revenue.

What about dividends? ESS has a 4.1% dividend yield. You can get higher on a 2-year Treasury but not on a 3-year, 5-year, 10-year, or 30-year Treasury. If you want that income to last more than 2 years, you’ll be stuck taking a lower rate.

ESS is a dividend champion. Over 25 years of consecutive dividend growth. The current payout ratio is only 65%. That gives them plenty of dividend coverage to continue raising dividends even if the economy struggles.

Industrial

Rexford (REXR) was on the list from our portfolio update as one of the “overpriced” positions we owned.

When the shares were priced at $74.59, the valuation was not compelling for building positions. However, shares trade at $60.23 today. That’s a much better deal.

Note: Rallied Monday to $61.50. Still in the bullish range, but it’s up over 2%.

Some investors actually argue against industrial real estate. Why? Someone told me vacancy would be an issue for them. That’s laughable. When did 98% occupancy become bad?

Tenants are paying huge leasing spreads:

Those huge increases in cash rents are not paying to get a lease with a low growth rate. The average annual rental increases for their contracts averaged 4.3% for 2022:

Q4 2022 was a bit better than average? Well, I guess the bears will need a new thesis since the fundamentals are hitting harder than a truck.

The dividend yield is only 2.1% today, but it’s often increasing faster than 10% per year. Want a higher yield and faster growth rate? Have you considered buying companies with declining fundamentals and rapidly rising payout ratios? We’re picking long-term winners.

I’ll be going over REXR’s fourth quarter preview in much greater detail for members of The REIT Forum. The article is not quite done yet, but it is coming. There’s already been some foreshadowing for what to expect by commentary from Prologis (PLD).

Bonus Pick

I wasn’t initially going to include Prologis in this article, but I will. It’s a bonus, so we’re sticking with the number 10 and just being bad at math. That’s OK, based on the consensus estimates we see a few years out, being bad at math should help us fit in on Wall Street.

In PLD’s earnings, they indicated that the gap between their current rental rates and market rates was at a new record high. The gap came in at 67.5%. Leasing spreads were attractive in 2022, but they should be even better in 2023. We published a huge update on PLD and the implications for other industrial REITs on The REIT Forum.

Manufactured Home Park

How about Sun Communities (SUI)?

SUI trades well below NAV. That’s particularly unusual. Further, I believe the NAV estimates were sandbagged:

What makes me say those estimates are junk? Well, SUI runs pretty light on leverage. Due to the low leverage, a reduction in real estate values wouldn’t be leveraged heavily.

The sharpest plunge occurs on October 25th, 2022. That’s right after the Q3 2022 results where SUI raised guidance. So what happened? I’ll go with something in the analyst’s modeling software.

Consensus estimates for growth in AFFO per share came down with an unusually low estimate for 2023:

Even if AFFO per share growth temporarily dropped to 2.5% for one year, the average growth rate (including the average forward growth rate) would still be strong.

I’ll take Equity LifeStyle (ELS) here as well. ELS has exceptionally long maturities on its debt, and the interest rates are low. While Treasury rates increased significantly during 2022, ELS already locked in their borrowing costs and should be able to continue delivering strong growth.

Tower REIT Time

How about American Tower (AMT)?

Hate the 2.9% dividend yield? I don’t care. I think it’s a bargain. The payout ratio is only 61%. Further, AMT has an excellent history of generating growth in AFFO per share. The business model scales very well as each new tenant added to a tower generates dramatically higher margins.

In the hypothetical, which I’ve found to be quite accurate while evaluating other transactions, the margins grow from 40% with one tenant to 74% with two tenants and 83% with three tenants.

If a tower will never have a second tenant, it’s a poor investment. If it will average two tenants, it’s an excellent investment. If it goes to three tenants, the returns are outstanding.

The ability to lease the same space out to a few tenants is critical to the long-term growth picture. As we see more deployment of 5G, it will require a significant increase in towers. 5G speeds are much faster, but ranges are much shorter, and consumers are only increasing data consumption.

At $221.23, AMT is trading at less than 22x forward AFFO. I think that’s a good deal, given the growth prospects.

Conclusion

There are still plenty of opportunities for REIT investors. We’ve included 10 shares where we believe investors are still getting a solid deal. Of course, there are several other choices worth highlighting also. However, 10 (or whatever number comes after 10) seems like more than enough for a single article.

To be clear, we have quite a few bullish views outside of the housing REITs. However, it was nice to have a theme throughout the article.

Bullish outlooks: AVB, EQR, CPT, ESS, MAA, UDR, REXR, PLD, AMT, SUI, ELS