Dow Theory's Top REITs

10/21/2019 5:00 am EST

Focus: REITS

Richard Moroney

Editor, Dow Theory Forecasts

For investors interested in real estate investment trusts, here are our two top picks based on a 12-factor analysis and ranking or all A-rated (above-average) REITs, notes Richard Moroney, editor of Dow Theory Forecasts.

Extra Space Storage (EXR) owns all or part of more than 1,100 self-storage locations and franchises nearly 600 additional sites. In the June quarter, rental rates rose 4%, contributing to 3.9% growth in samestore revenue.

The company operates a fairly diversified portfolio, with no more than 16% of its locations in any single metropolitan area. The company’s robust growth record (10-year annualized increases of 16% for revenue and 18% for per share profits) has historically earned it a premium valuation relative to its peers.

At 22 times funds from operations, Extra Space is 22% more expensive than the average REIT we cover. Analysts expect FFO to rise 5% this year and 4% next year, with estimates trending higher.

In the 12 months ended June, Lamar Advertising (LAMR) grew sales 6% and funds from operations 10%. The company operates about 157,000 billboards and 149,000 logo signs near highway exits, as well as 53,000 displays on public-transit infrastructure, such as buses and benches.

Lamar’s focus on advertising ties the company more to traditional economic forces than to the real estate-specific drivers that move the typical REIT, a characteristic that might appeal to investors not ready to commit fully to real estate.

At 14 times trailing FFO, Lamar trades 24% below the average for REITs we cover and 4% below its own three-year average. Lamar’s yield of 4.7% exceeds the 4.4% of the average REIT, yet the dividend equates to about two-thirds of FFO, slightly below the industry average.

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