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Don't fall into a REIT value trap — these 20 stocks score highest on quality

By Philip van Doorn

As shares of real estate investment trusts have soared, investors need to target quality companies

Shares of real estate investment trusts have soared this year as the economy has been recovering from the worst of the coronavirus pandemic. Because of the recent spike in delta-variant infections, we're not out of the woods yet. But investors remain confident.

Some of the best performers in the REIT sector this year have been companies focused on investments that were hit especially hard during 2020 -- retail and office properties. Looking forward, an emphasis on quality might serve investors well, rather than trying to catch the rebound wave late in the game.

Below is an updated screen of REIT stocks, based on a scoring-methodology framework provided in November (link) by Frank Haggerty, a senior portfolio manager at Duff & Phelps Investment Management in Chicago.

Haggerty co-manages the Virtus Duff & Phelps Real Estate Securities Fund , which is rated four stars (out of five) by Morningstar, the Virtus Duff & Phelps Global Real Estate Securities Fund (five stars) and the Virtus Duff & Phelps International Real Estate Securities Fund (three stars).

REITs as a group are still trailing

So far in 2021, the REIT sector of the S&P 500 Index has returned 28% with dividends reinvested, ahead of the full S&P 500's 17% return. But if we run a chart from the end of 2019, it is clear the REITs are lagging behind:

REITs are typically considered income investments, but those that hold attractive properties can also be growth stocks, with prices climbing over time as their rental income grows, or as they book profits on property sales.

For high current yields well-supported by expected funds from operations, 10 REITs are listed here (link). Funds from operations (FFO) is commonly used in the REIT industry as a measure of dividend-paying ability. It adds depreciation on real estate to earnings and nets out gains or losses on the sale of property.

A quality scoring might yield some REITs with relatively low dividend yields.

Then again, in a market with 10-year U.S. Treasury notes yielding only about 1.29%, it's easy for many REITs' dividend yields to be compelling.

New REIT screen

Getting back to the scoring methodology suggested by Haggerty, we need to make clear that he hasn't made any specific REIT stock recommendations for this article.

To take a look at a large set of data, we began with the 120 REITs in the S&P Composite 1500 Index, which is made up of the S&P 500, the S&P 400 Mid Cap Index (MID) and the S&P Small Cap 600 Index. . Then we narrowed the list to 95 companies covered by at least five analysts polled by FactSet, for which the consensus estimates required for the screen are available.

We then made more cuts:

AFFO is adjusted funds from operations. In the REIT industry, FFO adds depreciation and amortization back to earnings, while subtracting gains on the sale of property. Adjusted FFO goes further, netting out expected capital expenditures to maintain the quality of property investments. The lower the estimated AFFO payout ratio, the better, as it implies there will be headroom for dividend increases.

For all three rankings, lower scores were better. We then summed the three scores for each REIT. Combined scores ranged from 28 to 171.

Here are the 20 REITs with the best (lowest) scores. There are four tables of data for the same group of companies. The first table has the scores, the second table has the data from which the scores were derived, the third table has current dividend yields and total returns for various periods, and the fourth table has a summary of analysts' opinions about the stocks. You can get even more information by clicking individual tickers.

Here are the top 20 REITs by total score:

 Company   Investment focus  Total score (lower is better)  Debt rank  Dividend growth rank  AFFO payout ratio rank 
CareTrust REIT Inc. CTRE  Health care, senior housing  28  6  7  15 
Duke Realty Corp. DRE  Industrial  36  9  10  17 
Lamar Advertising Co. Class A LAMR  Billboards  39  31  3  5 
Mid-America Apartment Communities Inc. MAA  Apartments  41  14  16  11 
PS Business Parks Inc. PSB  Commercial properties  41  1  6  34 
Prologis Inc. PLD  Logistics facilities, warehouses  44  22  13  9 
PotlatchDeltic Corp. PCH  Timberland  52  4  47  1 
First Industrial Realty Trust Inc. FR  Industrial  52  24  14  14 
American Tower Corp. AMT  Cell towers  53  42  5  6 
Agree Realty Corp. ADC  Retail  55  7  15  33 
EastGroup Properties Inc. EGP  Industrial  59  15  28  16 
Alexandria Real Estate Equities Inc. ARE  Offices  62  29  12  21 
Innovative Industrial Properties Inc. IIPR  Industrial  62  2  1  59 
SBA Communications Corp. Class A SBAC  Cell towers  63  59  2  2 
Cousins Properties Inc. CUZ  Offices  63  10  43  10 
Life Storage Inc. LSI  Self storage  63  23  21  19 
Lexington Realty Trust LXP  Commercial properties  64  27  29  8 
Public Storage PSA  Self storage  65  3  30  32 
Rexford Industrial Realty Inc. REXR  Industrial  65  8  9  48 
Extra Space Storage Inc. EXR  Self storage  68  38  17  13 

As you can see, there is only one REIT on the high-scoring list of 20 that is focused on retail properties: Agree Realty Corp. (ADC).

During an interview, Haggerty said retail REITs probably "cannot return as a group to meaningful cash flow until next year." Their balance sheets might not be as well-positioned as other REITs and their dividend payout ratios are likely to be high, he added.

Leaving the REITs in the same order, here's the data backing the scores in the first table:

 Company   Total debt to estimated 2022 EBITDA  Estimated 2022 dividend growth  Estimated 2022 AFFO payout ratio 
CareTrust REIT Inc. CTRE  2.9  7.5%  73% 
Duke Realty Corp. DRE  4.3  6.3%  73% 
Lamar Advertising Co. Class A LAMR  5.2  21.6%  63% 
Mid-America Apartment Communities Inc. MAA  4.6  4.8%  72% 
PS Business Parks Inc. PSB  0.0  8.3%  79% 
Prologis Inc. PLD  4.9  5.8%  69% 
PotlatchDeltic Corp. PCH  2.0  2.1%  20% 
First Industrial Realty Trust Inc. FR  4.9  5.2%  73% 
American Tower Corp. AMT  5.9  15.8%  64% 
Agree Realty Corp. ADC  3.6  5.2%  79% 
EastGroup Properties Inc. EGP  4.6  3.7%  73% 
Alexandria Real Estate Equities Inc. ARE  5.1  5.8%  75% 
Innovative Industrial Properties Inc. IIPR  0.5  25.9%  109% 
SBA Communications Corp. Class A SBAC  8.0  23.8%  28% 
Cousins Properties Inc. CUZ  4.4  2.6%  70% 
Life Storage Inc. LSI  4.9  4.3%  74% 
Lexington Realty Trust LXP  5.0  3.6%  66% 
Public Storage PSA  1.2  3.5%  79% 
Rexford Industrial Realty Inc. REXR  3.9  6.3%  88% 
Extra Space Storage Inc. EXR  5.7  4.7%  72% 
Source: FactSet 

Here are the dividend yields and total returns (with dividends reinvested) for the group, with weighted aggregates for the S&P 500, the S&P Composite 1500 and those indexes' REIT industry groups, for comparison:

 Company   Dividend yield  Total return -- 2021  Total return -- 2020  Total return -- 3 years  Total return -- 5 years  Total return -- 10 years 
CareTrust REIT Inc. CTRE  4.34%  13%  14%  65%  113%  N/A 
Duke Realty Corp. DRE  2.02%  28%  18%  96%  118%  412% 
Lamar Advertising Co. Class A LAMR  2.87%  28%  -3%  65%  90%  446% 
Mid-America Apartment Communities Inc. MAA  2.21%  50%  -1%  109%  108%  269% 
PS Business Parks Inc. PSB  2.71%  18%  -17%  33%  60%  258% 
Prologis Inc. PLD  1.99%  29%  15%  120%  182%  388% 
PotlatchDeltic Corp. PCH  3.17%  5%  20%  29%  82%  130% 
First Industrial Realty Trust Inc. FR  1.97%  32%  4%  86%  119%  459% 
American Tower Corp. AMT  1.73%  26%  0%  111%  163%  530% 
Agree Realty Corp. ADC  3.51%  14%  -1%  55%  83%  422% 
EastGroup Properties Inc. EGP  1.80%  28%  7%  104%  182%  442% 
Alexandria Real Estate Equities Inc. ARE  2.30%  11%  13%  70%  109%  215% 
Innovative Industrial Properties Inc. IIPR  2.62%  18%  151%  619%  N/A  N/A 
SBA Communications Corp. Class A SBAC  0.70%  18%  18%  107%  201%  781% 
Cousins Properties Inc. CUZ  3.09%  22%  -15%  19%  51%  110% 
Life Storage Inc. LSI  2.65%  44%  15%  97%  96%  486% 
Lexington Realty Trust LXP  3.37%  22%  4%  69%  61%  157% 
Public Storage PSA  2.59%  36%  13%  54%  47%  252% 
Rexford Industrial Realty Inc. REXR  1.59%  24%  10%  110%  203%  N/A 
Extra Space Storage Inc. EXR  2.39%  47%  14%  96%  116%  959% 
 
S&P 500  1.36%  17%  18%  64%  121%  298% 
S&P Composite 1500  1.35%  17%  18%  62%  118%  290% 
S&P 500 Equity Real Estate Investment Trusts  2.45%  28%  -2%  58%  59%  185% 
S&P Composite 1500 Equity Real Estate Investment Trusts  2.69%  27%  -4%  49%  51%  170% 
Source: FactSet 

Note that the best performer over the past 10 years has been SBA Communications Corp. (SBAC), which also has the lowest current dividend yield.

Here's a summary of opinion for the 20 highest-scoring REITs among analysts polled by FactSet:

 Company   Share "buy" ratings  Share neutral ratings  Share "sell" ratings  Closing price -- July 21  Consensus price target  Implied 12-month  upside potential 
CareTrust REIT Inc. CTRE  100%  0%  0%  $24.41  $26.50  9% 
Duke Realty Corp. DRE  65%  29%  6%  $50.57  $50.80  0% 
Lamar Advertising Company Class A LAMR  20%  80%  0%  $104.49  $109.50  5% 
Mid-America Apartment Communities Inc. MAA  31%  69%  0%  $185.76  $180.08  -3% 
PS Business Parks Inc. PSB  0%  80%  20%  $154.72  $155.33  0% 
Prologis Inc. PLD  80%  15%  5%  $126.90  $133.68  5% 
PotlatchDeltic Corp. PCH  33%  67%  0%  $51.72  $64.83  25% 
First Industrial Realty Trust Inc. FR  50%  42%  8%  $54.86  $53.73  -2% 
American Tower Corp. AMT  74%  22%  4%  $280.26  $291.95  4% 
Agree Realty Corp. ADC  85%  15%  0%  $74.29  $78.92  6% 
EastGroup Properties Inc. EGP  20%  73%  7%  $175.24  $161.69  -8% 
Alexandria Real Estate Equities Inc. ARE  100%  0%  0%  $195.00  $199.95  3% 
Innovative Industrial Properties Inc. IIPR  75%  25%  0%  $213.70  $218.86  2% 

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