2 Surefire REITs to Hold for the Long Term

By design, Real estate investment trusts (REITs) tend to be good candidates for buy-and-hold investments, especially for the more conservative part of the portfolio that’s targeted toward growth and income.

For tax reasons, REITs are required to pay out at least 90% of their taxable income as dividends, and because of these investment vehicles tend to concentrate in specific industry segments, they can be solid picks for capital appreciation, too.

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Today, we are going to take a look at two REITs that have this potential. Each specializes in a distinct real estate niche, and while one’s been around for decades and the other’s a newcomer, they both have established track records and strategies that make them promising picks.

They are Alexandria Real Estate Equities (NYSE:ARE) and Innovative Industrial Properties (NYSE:IIPR). Here’s a bit more on these two surefire REITs.

1. Alexandria Real Estate Equities

Alexandria Real Estate Equities is an office REIT, and one of the larger ones, but even in this specialized sector, it’s not like all the others. Founded as a garage start-up in 1994, San Diego-based Alexandria is focused on the life science industry — a growth industry that has taken on even more critical importance since the arrival of the coronavirus pandemic.

Just one example: Alexandria recently penned a deal to build and operate a 462,000-rentable-square-foot (RSF) property at its Cambridge, Massachusetts, campus for COVID-19 vaccine-maker Moderna.

That property will become part of a portfolio currently comprising 63.9 million square feet — 38.7 million of it operating RSF and 25.2 million in various stages of planning and development — in collaborative life science, ag tech, and technology campuses primarily in and around Boston, San Francisco, New York City, San Diego, Seattle, suburban Maryland, and North Carolina’s Research Triangle.

The tenants are a diverse lot of ventures that provide high occupancy levels, long lease terms, and rising rental income. The company also is an active early-stage life science investor itself.

Alexandria stock is priced near its 52-week high that was set in late October and the REIT’s market cap sits at $31.9 billion. Its annual dividend of $4.48 per share yields 2.16% at its current share price, which is a relatively low yield for REITs but mostly a reflection of its strong stock price at the moment. So the stock is clearly trading at a premium. But it’s been on a steady climb over the past five years and its metrics suggest that price climb will continue, as will its dividend. 

2. Innovative Industrial Properties

While providing start-up capital is a small part of Alexandria’s business, that strategy is the crux of the success that Innovative Industrial Properties (IIP) has seen since it was founded in 2016 as the first provider of industrial production properties to the medical marijuana sector.

Also based in San Diego, IIP buys freestanding industrial and retail properties from state-licensed medical-use cannabis operators and leases the properties back under long-term net lease agreements that typically have 10- to 20-year lifespans and annual base rent escalations of 3% to 4.5%.

As of Oct. 18, IIP owned 76 properties in 19 of the 36 states where medical marijuana is legal. The 7.5 million RSF portfolio is 100% leased with about 16.7 years remaining on the average deal.

IIP went public in December 2016 at $20 a share, but the price fell 4% on its first day out of the gate. That was hardly a sign of things to come. The stock price has soared more than 1,200% since then. Meanwhile, the dividend has grown by 900%, from $0.15 per share in its first quarterly payout in June 2017 to $1.50 in September 2021.

IIP stock is trading at or near its 52-week high, which puts its market cap at $6.7 billion. It generates $6 per share each year in dividends, resulting in a yield of 2.15%. Much like Alexandria, the dividend yield is somewhat on the low side as REITS go only because the stock price is doing so well at the moment. Remember, that both these stocks pay out a decent dividend but are in this story as much for their capital appreciation abilities going forward. Also, keep in mind that S&P 500 stocks are also averaging only 1.3% yields, so both REITs are outperforming the broader market as it relates to dividends, even at their elevated prices.

Two strong players in two different fields

Alexandria Real Estate Equities and Innovative Industrial Properties both appear poised for continued long-term growth. Their competition is growing, too, as other companies move aggressively toward adding life science space to their portfolios and getting involved in the legal marijuana real estate business. But both these recommended companies have solid head starts and business models that make them solid candidates for long-term buy-and-hold stocks right now and going forward.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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