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REITs were long thought to be relatively safe investments for yield-seeking investors. The COVID-19 pandemic has changed that assumption quickly and dramatically. Owning the wrong REITs could be a costly mistake, which is why we'll show you which one to avoid on top of the best REITs to buy today.
As all levels of government moved to shut down the economy and strongly suggest people stay home, rents stopped getting paid on apartments and offices across the country. Restaurants had to lay off all their workers, and they could not make rent payments either. REITs saw earnings collapse, and many have cut or eliminated their dividend payout since the economy was shut down in March.
Given that the second quarter was likely worse than the first one, we have probably not seen the last of the pay cuts from real estate investment trusts.
While it can be easy to focus on the doom and gloom of it all, all investors should keep in mind that the best time to buy is when the blood is running in the streets. While we have a healthcare crisis that is hurting the economy, a recovery is coming. Businesses are starting to reopen across the United States, and we will eventually see a return to normality.
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When it does, many of the current battered REITs will see a rapid recovery in their stock price, and the dividends will be reinstated and start growing again.
That makes these two REITs some of the best investments you can make right now. And to make sure you're totally protected, we'll also show you the top REIT to avoid right now too...
REIT to Buy Right Now, No. 1: Independence Realty Trust
Apartment REITs got walloped when something like a third of all renters missed payments in April. The federal government, along with the state governments, rushed to get cash in the hands of the more than 30 million folks who lost their jobs. They also provided loans to businesses so they could continue to meet payrolls. As that cash began to flow, people started paying their rent once again, and the number of delinquent payments dropped sharply in May. It should drop back when June rents are due.
That's fantastic news for REITs like Independence Realty Trust Inc. (NYSE: IRT). Independence is a real estate investment trust that owns and operates multifamily apartment properties across non-gateway U.S. markets, including Atlanta, Louisville, Memphis, and Raleigh. These second-tier cities are going to see population growth after the pandemic as people realize that there are downsides to living in dense urban areas like New York. It is less crowded, and rents are much lower in Independence's core markets, and that's going to help attract and retain tenants.
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Independence has been working with struggling tenants to work out payment plans, and so far rent collection rates have been higher than may other apartment operators. The board reduced the dividend to conserve cash until the pandemic passes in the history books. Even after the reduction, the shares are yielding almost 5%.
REIT to Buy Right Now, No. 2: BRT Apartments
BRT Apartments Corp. (NYSE: BRT) is another REIT that's has avoided the big gateway markets. Most of BRT's properties are in the Southeastern United States and Texas, although they do have three properties in the Midwest. BRT also has strong rent collection results in April and May. BRT collected 96% of the rent from its multifamily properties for May. This is in comparison to 96% collected through roughly the same period in the month of April. While they do have some tenants struggling during the crisis, management is working with these tenants to put together payment plans to keep them in their homes.
BRT is currently paying a dividend yield of over 9%.
Both Independence Realty and BRT Apartments should see their stock price soar when the economy is completely opening and functioning at pre-pandemic levels.
And while these REITs are buying opportunities thanks to their current discount, not all REITs are worth owning, even at a cheap price.
This is one to avoid right now, even though its current dividend yield will lure in many unsuspecting investors...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
REIT to Avoid: S.L. Green Realty Corp.
One segment that is probably best to avoid is New York City office REITs. New York has suffered a stunning blow for the coronavirus, and offices have been mostly empty since March across the city. Many of those businesses could fail, and it is going to be a while before the New York City economy to look anything like it did in January of this year.
The success of having executives and employees work from home is going to have many companies questioning the need for office space. James Gorman, the CEO of Morgan Stanley (NYSE: MS), one of the biggest employers in the city, said last month that he sees his company operating with much less real estate in the future. He is not going to be the only CEO who comes to that conclusion.
That is terrible news for REITs like S.L. Green Realty Corp. (NYSE: SLG). S.L. Green's entire portfolio is located in Manhattan. They are the largest office landlord in Manhattan, and that could be problematic. New York is likely facing some version of a new normal that includes less office space demand.
The stock has declined by almost 60% in the last year. The current dividend yield is over 9% at this price. At first glance, that may seem attractive, but this REIT has a long, difficult road ahead of it, and the shares are best avoided right now.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.