The Top-Performing Real Estate Investment Trusts in May

Navigating the REIT Landscape

Top-performing REITs in May 2023 include Peakstone Realty Trust, Apartment Investment & Management Co., and Service Properties Trust, all of which have risen by 45% or more in the past year. Despite the continued volatility in U.S. real estate markets, these REITs have shown promising performance, even as the Real Estate Select Sector SPDR Fund (XLRE) declined by 13% over the past 12 months.

When evaluating REITs, it's important to consider them in three categories: best value, fastest growth, and most momentum. For instance, best value REITs are those with the lowest 12-month trailing price-to-earnings (P/E) ratio, indicating that investors are paying less for each dollar of profit generated. Examples include H&R Real Estate Investment Trust, Nexus Industrial REIT, and Apollo Commercial Real Estate Finance Inc.

Fastest-growing REITs are evaluated based on both their most recent quarterly year-over-year percentage revenue growth and earnings-per-share (EPS) growth. Two Harbors Investment Corp., Apollo Commercial Real Estate Finance Inc., and Farmland Partners Inc. have shown significant growth in this category.

Finally, REITs with the most momentum have shown the highest total stock-price return over the past 12 months. Notable REITs in this category include Peakstone Realty Trust, Apartment Investment & Management Co., and Service Properties Trust.

Analyzing REITs: Key Metrics

Understanding specific metrics is crucial when analyzing REITs due to their specialized structure. Two key metrics include funds from operations (FFO) and adjusted funds from operations (AFFO). FFO measures a company's cash flow generated through its business operations by adding and subtracting certain items from net income, while AFFO considers the ongoing costs of managing a real estate property over its life. These metrics are especially useful in determining a company's ability to pay dividends to stockholders in the future.

The Appeal of REITs

Investing in REITs offers two primary advantages: liquidity and diversification. While real estate investments typically have a favorable risk/return profile with less volatility compared to other assets, they often require a significant financial commitment and are typically illiquid. REITs address these issues by trading their securities on major stock exchanges and holding a diverse portfolio of different property types. This flexibility allows investors to diversify their holdings and enter or exit positions with relative ease.

In conclusion, while REITs come with their own set of risks and considerations, they offer an accessible way for individual investors to tap into the lucrative real estate market. By understanding how REITs operate and how to analyze them, investors can potentially unlock a robust source of dividends and gain exposure to real estate, all without the need to directly own, operate, or finance properties.

REITs: A Closer Look at Some Top Performers

Taking a closer look at some of the top performers in the REITs landscape can provide useful insights for potential investors. For instance, the H&R Real Estate Investment Trust is a North American REIT with a diverse portfolio of residential, commercial, and office properties. It recently sold an Ottawa office property for $277 million, indicating a proactive approach to property management.

Nexus Industrial REIT, on the other hand, focuses on industrial and retail properties in North America. Meanwhile, Apollo Commercial Real Estate Finance Inc. is a private equity firm that invests in buyouts, distressed assets, and acquisitions. Recently, Apollo Global announced that a fund managed by its affiliates agreed to acquire Univar Solutions, a specialty chemical distributor, in an all-cash transaction totaling $8.1 billion. This demonstrates a diversified investment strategy that extends beyond real estate.

Two Harbors Investment Corp., one of the fastest-growing REITs, finances and manages mortgage-backed securities. Despite reporting a net loss in the first quarter due to significant losses on servicing assets and interest-rate volatility, the company's aggressive growth strategy makes it an interesting option for investors looking for high-growth potential.

Farmland Partners Inc., another fast-growing REIT, acquires farmland in North America and provides farmers with secured loans. Recently, the company sold more than 2,400 acres of land in Nebraska and South Carolina, demonstrating an active approach to asset management.

In terms of momentum, Peakstone Realty Trust stands out. This REIT primarily owns single-tenant industrial properties and recently reported first-quarter net income 30 times greater than the previous year's period. This was partially due to multiple property sales totaling $169.6 million, indicating strong momentum.

Understanding the Risks and Rewards

Like any investment, REITs come with their own set of risks. These include the potential for property devaluation, the impact of economic cycles on real estate demand, and interest rate risk. However, the potential rewards can be considerable. The income generated from rents and property sales can translate into significant dividends for investors. Plus, the potential for long-term property appreciation can lead to substantial capital gains.

Investors interested in REITs should do thorough research, understand the key metrics for analyzing these types of investments, and consider the specific risk factors associated with real estate. By doing so, they can make informed decisions that align with their overall investment strategy and risk tolerance.

What are REITs and Their Functioning

Real Estate Investment Trusts, commonly known as REITs, are companies that own or finance income-generating real estate across a range of property sectors. They provide a way for individual investors to earn a share of the income produced through real estate ownership, without actually having to go out and buy commercial real estate.

The functioning of REITs is similar to mutual funds. They allow both small and large investors to acquire ownership in real estate ventures, operate commercial properties, or engage in other real estate-related activities. These trusts are required by law to distribute at least 90% of their taxable income annually in the form of dividends to shareholders.

In essence, REITs offer the benefits of real estate ownership without the headaches or expense of being a landlord or dealing with property management. This is why they've become an integral part of the investment portfolios of both individual and institutional investors, providing a solid investment option with the potential for steady income and long-term capital appreciation.

Two key requirements of a REIT are to pay a minimum of 90% of taxable income in the form of shareholder dividends each year and invest at least 75% of its total assets in real estate. There are various types of REITs available, including equity REITs, mortgage REITs, and hybrid REITs, offering a range of options for investors depending on their risk tolerance and investment goals.