BBuying stocks when the market is down can be a great way to boost your investment portfolio. Real estate investment trusts (REITs) are particularly attractive since dividend yields and price have an inverse relationship.
When stock prices fall but dividend payments stay the same, dividend yields rise, making REITs the ideal bargain.
Prologis (NYSE: PLD) and Digital Real Estate Trust (NYSE: DLR) are two high quality REITs which are trading at a notable discount to recent highs. Here’s a closer look at each company and why investors may want to stock up on these discounted stocks.
1. Dominating the industrial industry
Prologis is one of the largest REITs by market capitalization and the largest industrial operator worldwide. The company, which buys, develops and leases industrial real estate such as warehouses and distribution centers, owns interests in or owns more than 4,700 properties in 19 countries.
A limited supply of industrial space and the growing need for industrial real estate in the e-commerce and retail sector have pushed rental growth and occupancy rates to records for the REIT since 2020. Investors feared that the potential impacts of the recession would hurt industrial demand. But the latest earnings report from Prologis has eased concerns as strong demand continues.
The occupancy rate in the second quarter of 2022 was 97.6% and its net effective change in rents, or rent growth, has increased by more than 45% over the past year. Not to mention, the company is extremely well funded with over $5.2 billion in cash and cash equivalents, which is more than enough to cover its current debts, and it’s growing like crazy. It is currently being acquired Duke Real Estate (NYSE: DRE)a smaller but fast-growing industrial REIT, and plans to spend an additional $1.2 billion to $1.7 billion on acquisitions this year.
Prologis’ incredible performance since the start of the pandemic has driven its share price up 64% over the past three years. But recent market volatility has put it on sale, down 24% from recent highs. Considering its price is trading at a fair valuation of 17 times its funds from operations (FFO) and paying just over a 2% dividend yield, it’s a bargain right now.
2. Short-term headwinds but long-term opportunities
Data centers are a complex industry, but they play a increasingly important role in our technology-driven economy. Almost everything we do today, such as interacting on social platforms, teaching online, using cloud-based services, streaming, online sales, and even augmented reality, relies on data centers to operate.
Although there are several options for investing in data centers, Digital Realty Trust is one of the few remaining Data Center REITs and among one of the largest data center operators in the world. As of the second quarter of 2022, the REIT held interests in and owned nearly 300 data center facilities that help store and aggregate digital data for more than 4,000 customers across six continents.
The REIT is down 26% from recent highs due to general market volatility, but also due to several short-term headwinds in the data center industry, including the challenges of the supplies that have made it difficult to source parts important to the operation and development of its centers, but also currency changes.
Its latest earnings showed very lackluster growth, with revenue up 1% quarter-over-quarter and 4% year-over-year, while its FFO and net operating income (NOI), both of which are important measures for assess the profitability of a REITare down from the previous year, which isn’t great.
But if we think long term, in 10 to 15 years, there is no doubt that data centers will continue to see an increasing demand and need for data storage space as new technological advances are made. The necessity-based role it plays is why I think data centers are one of the greatest investment opportunities of the coming decade and why it’s a great buy, especially as stock prices are down today.
Digital Realty Trust’s price to FFO ratio is around 20, which means its price is reasonable by REIT standards. Additionally, the REIT has posted 17 consecutive years of dividend increases, with a dividend yield of 3.65%, more than double that of the S&P500 today.
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Liz Brumer Smith has positions at Digital Realty Trust, Duke Realty and Prologis. The Motley Fool fills positions and recommends Digital Realty Trust and Prologis. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.