Investors can sometimes get caught up in the short-term volatility of stock price movements. But the savvy investor knows that the best investment opportunities often come when stock prices are far off their fundamentals and clouded by pessimism.
31% and 37% less so far this year, respectively, Digital Real Estate Trust (DLR 0.17%) Y Simon Property Group (SPG 0.16%) are two real estate investment companies (REITs) whose fundamentals are stronger than their recent performance suggests. By context, this is much worse than the S&P 500 17% drop rate during that time. Let’s dive into the case of each REIT.
1. Digital Real Estate Trust
What innovation of the last 70 years has revolutionized the world more than any other? I’d say the answer is mainframes, now known as data centers. Without data centers, the modern economy as we know it would not exist.
Everything from online shopping to checking emails, browsing the web and streaming video depends on the ability of data centers to connect devices, process data and store it. And everyone has Digital Realty’s 300+ trusted data centers around the world to thank for constant access to the web and all its conveniences.
As the prevalence of e-commerce and video streaming continues to increase around the world, so will the demand for data centers. This is why market research firm Allied Market Research forecasts that the global data center industry will expand by 10.5% each year, from $187.4 billion in 2020 to $517.2 billion in 2030.
Because Digital Realty is already a major player in the data center market, the law of large numbers dictates that its growth will likely lag that of the industry as a whole. However, it is reasonable to expect that the core of the company operating funds (FFO) per share will grow at least in the upper half single digits annually for the foreseeable future.
Digital Realty offers passive income investors a 4% dividend yieldwhich is well above the 1.6% return of the S&P 500 index. Since the dividend payout ratio it will hit 71.8% in 2022, the dividend is certain and should grow as fast as basic FFO per share.
And due to the massive drop in Digital Realty’s share price in recent months, the stock’s valuation has become intriguing. Digital Realty trades at a forward price to core FFO per share of just 17.9, which, in my opinion, is a bargain for a leader in an up-and-coming industry.
2. Simon Real Estate Group
What is the first word that comes to mind when you think of shopping malls in this so-called golden age of e-commerce? Outdated? Perhaps prehistoric? The owner of one of the world’s largest shopping malls, known as Simon Property Group, has been working to dispel these preconceived notions. As of June, the REIT owned wholly or partially owned interests in more than 200 retail, dining, and mixed-use properties in the US, Europe, and Asia.
Shopping centers have had to adapt to the current environment or finally succumb to it. Shopping malls cannot compete with e-commerce if they don’t focus on providing a unique experience for the consumer. While consumers can shop online from the comfort of their own homes, the novelty of high-end shopping malls is still unmatched.
Simon Property Group realized years ago that it would have to improve the consumer experience to survive and prosper. This is the reason why the company has cool features added to its shopping malls in recent years, such as food courts, restaurants, and aquariums.
At first glance, Simon Property Group’s 6.9% dividend yield looks like a yield trap: too good to be true. But with the dividend payout rate set at around 59% in 2022, Simon Property Group is definitely not a performance trap. And yield-oriented investors can purchase shares of the REIT at a forward price to FFO per share ratio of just 8.6.