One of the more curious IPOs proposed this year was WeWork. Although growth in the co-working spaces that the company markets should continue, management turmoil and an uncertain financial position led to the cancellation of the proposed stock offering.
But here’s the strange thing—WeWork was never marketed as one of the REITs to buy. In fact, WeWork billed itself as a “tech company.” Huh?
This seems like a misleading description when the company’s primary offering is office real estate. In 2019, I do not know of anyone else who would describe offering electricity and a wi-fi connection as “tech.” The fact that it did not bill itself as a REIT was the biggest reason I planned to not recommend WeWork to stock investors.
Thankfully, investors have numerous choices in office and data center REITs to buy that not only earn a profit, but also pay a dividend. Here are a few that probably would have outperformed a prospective WeWork stock:
Boston Properties (BXP)
Boston Properties (NYSE:BXP) is one of the REITs to buy due to its size. It has become one of the largest owners of Class A office space in the U.S. It holds property in five key markets: Boston, Los Angeles, New York, San Francisco, and Washington, D.C.
The company manages 48.4 million square feet across 164 office properties. Though most consider it an office REIT, it also owns a few residential and retail properties as well as a hotel.
Like most REITs, the company cut the dividend during the financial crisis. Since then, the payout has steadily risen. Current holders of BXP stock receive an annual dividend of $3.80 per share. This brings a cash return of just under 3% at current prices.
At a forward price-to-earnings (PE) ratio of just over 40, BXP stock is not cheap. The five-year average annual earnings growth rate of 7% makes it seem pricier.
Boston Properties stock has risen about 265% since the height of the financial crisis. Still, even if the multiple caused it to pause for a time, investors should see stock and dividend growth over the long haul. This, along with holdings in some of the strongest real estate markets in the country, should make BXP stock one of the more solid REITs to buy.
City Office REIT (CIO)
City Office REIT (NYSE:CIO) acquires and manages office properties, primarily in the southern and western United States. Their holdings consist of 64 office buildings in eight metro areas. They currently have about 5.7 million square feet of net rentable space.
CIO stock opened trading in April 2014 at $12.50 per share. More than five years later, it trades at around $13.50 per share. As the stock gained traction this fall, the company announced an offering of an additional 6 million shares.
Fortunately for investors, CIO’s status as one of the REITs to buy lacks hinges on its payouts. City Office has paid an annual dividend of 94 cents per share since inception. At today’s prices, that amounts to a yield of about 7%. This dramatically exceeds the equity REIT average of 3.54%. Due to this high payout, investors will likely struggle to find a cash return higher than the one provided by CIO stock.
CoreSite Realty Corporation (COR)
CoreSite Realty (NYSE:COR) operates in a subsection of office REITs sometimes called “data center REITs.” While this does not make them a tech company, CoreSite provides spaces ideally-suited for the servers that run data center facilities. They facilitate tech by offering space for colocation, interconnection, and cloud services. The buildings themselves also feature backup power sources, as well as physical spaces that are cooled and physically secured.
Analysts expect the demand for data centers to see massive growth for years to come. This may explain why COR stock trades at a forward PE ratio of 54.7. Although expensive for this type of stock, few REITs will match the 14.95% average annual growth forecasted for the next five years.
Also, few other REITs to buy can match the historical dividend growth rate. COR stock paid 52 cents per share when it first began trading in 2010. Today, CoreSite shareholders receive $4.88 per share in annual cash payouts. This yields about 4% now and will likely rise as it increases its data center real estate holdings.
For shareholders who want a REIT with both income and comparable growth to many tech stocks, COR stock should serve them well long-term.
Digital Realty Trust (DLR)
Digital Realty Trust (NYSE:DLR), like Coresite Realty, specializes in data center properties. These properties continue to see demand rise on many fronts. The cloud industry continues to see massive growth. Moreover, as 5G begins to come online, the importance of the data center spaces it provides will only rise for the foreseeable future.
At a forward PE ratio of 90, DLR stock is expensive, particularly for a REIT. However, it exhibits something rarely seen in REITs to buy—fast growth. Profits saw little increase this year. Still, analysts project that the company will see its earnings grow by 21.3% next year. Profit growth should also remain in the double-digits for the foreseeable future.
This has also shown up in the price of DLR stock. Digital Realty traded in the $47 per share range as late as 2013. Today, Digital Realty stock sells for about $133 per share.
Dividends have shown a steady pattern of growth over the years. The 14th consecutive annual payout hike took this dividend to $4.32 per share annually. That amounts to a yield of about 3.30%. Despite the high cost of the stock, cloud and data center growth should keep DLR stock moving higher for years to come.
Easterly Government Properties (DEA)
Easterly Government Properties (NYSE:DEA) acquires, manages, and owns office properties that it leases to the U.S. government. Due to its main client, the Washington-based REIT owns numerous properties in the Washington, D.C. metro area, though it has holdings across the U.S.
Since the Federal Government has seen a continual growth trajectory for decades, its need for office space has naturally increased. This keeps occupancy rates for Easterly Properties at 100%.
Investors currently earn a return of 4.79% on the $1.04 per share annual dividend. This has remained stable, and it exceeds the average for equity REITs.
However, DEA stock has become expensive by just about any measure. The minuscule profits send its PE ratio to outlandish highs. Also, its price-to-sales (PS) ratio of almost 8.2 dramatically exceeds that of most REITs. At close to $22 per share, DEA stock has again marched toward record highs. If the stock forms a double top here, investors who buy now could face some pain.
Hence, investors should treat DEA stock as an income play. With a higher-than-average payout, and a stable client that continuously needs more space, few REITs to buy have a more reliable book of business than DEA stock.
Highwoods Properties (HIW)
Highwoods Properties (NYSE:HIW) acquires and manages office properties across nine markets located mainly in the southeastern U.S. The company began operations in Raleigh in 1978 and has expanded across its region. Today it owns over 30 million square feet of space.
Stability makes this one of the REITs to buy. The company boasts conservative management and credits that with maintaining its payout during the financial crisis. It has increased its dividend for three consecutive years. Today its annual dividend of $1.90 per share yields just over 4.3%.
HIW stock has also shown slow but steady growth since the financial crisis. Falling below $19 per share in 2009, it has steadily climbed over the last ten years. Today, HIW sells for about $44 per share.
Currently, HIW stock trades at a forward PE ratio of around 32.8. That may seem expensive for an equity expected to grow by an average of 8% per year over the next five years. However, the higher-than-average, growing dividend may mitigate any potential losses.
Moreover, the company has an additional 1.3 million square feet in the development pipeline. It also holds the potential to develop another 5.12 million square feet. This should bolster continued dividend growth and make the higher cost of HIW stock pay off for investors long term.
Hudson Pacific Properties (HPP)
Hudson Pacific Properties (NYSE:HPP) owns more than 20 million square feet of office space along the West Coast of North America. Based in Los Angeles, many of the highest-profile companies in the tech industry occupy its office space, especially in Silicon Valley and Seattle. Holding these tech tenants has helped keep occupancy rates high and rental prices rising.
HPP stock pays a dividend of $1 per share. This takes the yield to just under 3%. That may lag other office REITs, however, it benefits from a gradually-rising dividend.
Still, HPP stock has tripled in value since 2011. Consequently, the forward PE has risen to 56. With a forecasted growth rate of 9% per year over the next five years, HPP has become one of the pricier REITs to buy. Moreover, the company’s increased focus on core assets led to some divestments which have temporarily hurt profits.
Despite the high costs, the company should thrive regardless of the economy. The advent of technologies such as 5G, artificial intelligence, and the Internet of Things should keep tech clients in Hudson Properties spaces for years to come. This stability by itself could keep HPP stock an attractive investment despite its valuation.
Author: Will Healy
Source: Investor Place: 7 Office REITs to Buy That Would Outperform a WeWork Stock