After the 2000s, where real estate prices skyrocketed to unreal levels before crashing and nearly taking the entire economy with them, the majority of investors are understandably skittish about reinvesting in that market. After all, housing has already proven itself to be volatile and prone to the biggest of bubbles.
Slowly but surely though, investors have begun to creep back into the market, notably through Real Estate Trusts, commonly known as REITs. REITs tend to spread out risk by holding several income-producing real estate ventures, like apartment buildings.
Of course, like real estate investments not all REITs are created equal. But by isolating a few key metrics investors can dig up the ones with more solid foundations and hopefully find plays with a minimal amount of risk.
To find stronger REITs, we wanted to find investments that fit into these criteria:
1. A price-to-cash and price-to-book ratio over 1.
It’s important for finance companies to have strong book value and cash, in addition to validation of these assets by the market. A floor of 1 helps assure this.
2. An operating margin of 25 percent or better.
A high operating margin indicates the company is allocating capital efficiently.
3. A positive return on investment (ROI.)
This shows the REIT is using invested capital wisely.
4. An analyst consensus of at least “buy.”
While we trust our metrics, it certainly does not hurt to have the agreement of the experts.
After applying these criteria we found four REITs that fit the bill. It should be noted none of these REITs have provided substantial gains over the last year with two actually losing a bit of value. However, REITs are still rebounding, not to mention they tend to provide a nice dividend, and thus can be considered less growth plays and more value storage investments.
The four REITs we isolated are:
Equity Lifestyle Property Inc. ($ELS)
Market Cap: $3.19 billion
Dividend: 2.6 percent
Essex Property Trust (ESS)
Market Cap: $5.71 billion
Dividend: 3.16 percent
PennyMac Mortgage Investment Trust (PMT)
Market Cap: $1.5 billion
Dividend: 2.36 percent
Post Properties Inc. ($PPS)
Market Cap: $2.47 billion
Dividend: 2.91 percent
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