Real estate investment trusts (REITs) had a tough 2020 as the pandemic caused lower property valuations and a weak leasing environment across many sectors. As a result, the S&P REIT Index fell 11% and woefully lagged the S&P 500 benchmark which was up 16%.
The narrative has changed in 2021. A rebounding economy has spurred rental demand and raised property values in several corners of the real estate market. With REITs up approximately 16% year-to-date and outperforming the broader market, many investors are looking to ride the real estate recovery.
While certain groups like office REITs may have a longer road to recovery, others are getting a head start because of the types of properties they specialize in. Here we highlight three undervalued companies with unique exposure to some of the faster growing segments the REIT industry.
What is a Good 5G Infrastructure Stock?
American Tower (NYSE:AMT) is more of a play on the global 5G networking buildout than a recovery in traditional real estate. That’s because the company owns and leases wireless communications towers in addition to antenna structures used for television and radio broadcasting.
The REIT therefore has a unique tenant base comprised of telecom service providers and media companies. During COVID-19, its towers have played a key role in making sure people have access to data and high-speed internet while working and playing from home.
But looking beyond the current environment, American Tower has plenty of opportunity to build off its strong track record of profitability. It has a dominant position in the communications infrastructure market that will allow it to generate multiyear growth as the world transitions to 5G.
The company continues to acquire new assets overseas to boost its scale and allow its industry leading profit margins to go to work with tenants paying higher lease rates year after year. American Tower is trading around 27x funds from operations (FFO) and has room to expand to at least its five-year historical peak of 32x on account of its growth prospects in 5G infrastructure.
Is Digital Realty Trust a Good REIT to Own?
Another unique REIT with exposure to above industry growth is Digital Realty Trust (NYSE:DLR). Its area of expertise is developing data centers for a wide range of businesses. The company’s properties are strategically located in some of the world’s fastest growing markets where cloud computing, social media, and financial companies are a source of strong leasing demand.
The buildings contain a sea of computers, storage systems, and communications wiring that allow an enterprise to have a centralized information technology (IT) hub. And with businesses across many industries transforming their IT platforms from on-premise data centers to remote, cloud-based centers Digital Realty also stands to benefit from a multiyear growth trend.
The REIT has a strong and growing presence in the global data center space. The European market is a particularly promising growth market because data storage companies there have high pricing power and ample room for growth as the region embraces the cloud transformation. Digital Realty is in the process of integrating its latest European acquisition, Amsterdam-based data storage company Interxion, which will strengthen its presence there.
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