REITs come in all shapes and sizes and expose their investors to different types of investment properties and risks. REITs are required to pay out most of their earnings to investors and are taxed differently than other investments, so please consult a tax specialist before investing in a REIT. REITs paying out most of their income are supposed to help investors by making manage the company’s remaining capital better. Below, we will take a look at three REITs that support three different sectors of the economy. Essex Property Trust Inc (NYSE:ESS), Government Properties Income Trust (NYSE:GOV) and Federal Realty Investment Trust (NYSE:FRT) each have a different flavor of real estate, and each comes with their own strengths and weaknesses.
Essex Property Trust Inc (NYSE:ESS) is one of the largest developers and operators of apartment communities with over 163 communities and nearly 34,000 individual units. Essex Property Trust Inc (NYSE:ESS) truly has its fingers on the pulse of the rental market. This model was a winning combination for Essex Property Trust Inc (NYSE:ESS) during the financial crisis. When millions of homeowners turned to rentals as they were foreclosed on Essex Property Trust Inc (NYSE:ESS) saw occupancy rates in the mid-nineties. As we see the housing market pickup again, we will see pressure put back on rental rates in some markets that Essex Property Trust Inc (NYSE:ESS) operates in and could squeeze margins.
Essex currently has operating margins of 34.2% and sports a dividend of 3.1%. Essex has reported double-digit revenue growth for the past four quarters, increasing an average of 26.5%. REITs are generally fuelled by debt, so the low interest rate environment that we are in is a double edged sward for Essex. On one hand, Essex’s tenants may be encouraged by low interest rates to stop renting and own their own home. Whereas, on the other hand Essex can use the low interest rates to build out more apartment communities and boost shareholders returns without issuing more stock.
Government Properties Income Trust (NYSE:GOV) is a real estate investment trust that owns more than 70 properties in 29 states and the District of Columbia, with over 9 million rentable square feet. Government Properties Income Trust (NYSE:GOV) leases nearly 70% of its rentable space to the US Federal Government, 18% to state governments and 2% to the United Nations. Government Properties Income Trust (NYSE:GOV) was under scrutiny this past spring when the sequester put all government spending under fire. This was a knee jerk reaction by investors. Government Properties Income Trust (NYSE:GOV) rents most of its space to essential government functions like the Internal Revenue Service.
Government Properties Income Trust (NYSE:GOV) currently has operating margins of 32% and pays out a mouthwatering dividend of 6.6%. Government Properties’ dividend is slightly higher than that of the retail or residential spaces because it gives up some of the growth prospective that residential and retail REITs can take advantage of. The tradeoff that income investors are willing to make when they purchase Government Properties is a mouthwatering dividend with very stable customer, without the prospect of out sized share appreciation. Government properties is a great investment alternative to bonds that don’t even keep up with inflation.
Time to go shopping!
Federal Realty Investment Trust (NYSE:FRT) Investment Trust specializes in the ownership, management and development of retail and mixed-use properties, with a focus on metropolitan markets on either coast. Federal Realty Investment Trust (NYSE:FRT) owns over 19.3 million square feet of retail space and rents it out in long term leases to high profile clients like Whole Foods Market, Inc. (NASDAQ:WFM). Federal Realty Investment Trust (NYSE:FRT) has roughly 35% of its long term contracts up for renewal. Federal Realty Investment Trust (NYSE:FRT)is going to profit nicely as most of these contracts haven’t been renewed since 1993. Even with the consumer home real estate bubble, shopping centers in Metro areas have seen increasing foot traffic every year.
The incredibly stable environment of cities allows Federal Realty Investment Trust (NYSE:FRT) to charge its customers a premium on the land that it owns. This is why Federal Realty has operating margins of nearly 42%. Federal Realty has weathered the economic recession better than most, even raising its dividend during the height of the recession. The down side of all of this stability is that investors see this nearly $8 Billion dollar REIT as a safe haven and have bid up the price pushing; this in turn pushed the yield down to 2.5%. Investors in Federal Realty should be looking for growth and stability, not income.
Foolish bottom line
REITs have traditionally been a great way to generate income for investors, and many still are. All three of the REITs are leaders in their respective expertise and can offer great diversification and stability to anybody’s portfolio. If you already have retailers in your portfolio, you might be better investing in a company that gets its revenue from government clients than investing in a retailers land lord. If you own home builders, you may want to consider Federal Realty and get exposure to tenants in the retail space.
All three of these investments capitalize on the fact that there is not any more land being created, and as the economy recovers and households are looking for their own land, these companies will see their assets appreciate. I would recommend all three of these stocks as leaders in the REIT space.
The article Which Real Estate Company Is REIT for You? originally appeared on Fool.com and is written by Wes Patoka.
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