3 REITs to Buy During a Tech Sell-Off
It hasn’t been a great year for tech investors. The Nasdaq is down 27%. Several big-name tech stocks are down even more, with a few down as much as 80%.
That said, drawdowns like this are relatively normal for the stock market. The Nasdaq has dropped at least 7% in a day 10 times since 1987. Easy money overheats the market, the market corrects, and then eventually, stocks return to a long-term uptrend.
Of course, it’s far easier to be a long-term-oriented growth investor when stocks are going up. I wouldn’t blame anyone for wanting to stay away from tech for a little while.
Today, we’re going to talk about three real estate investment trusts (REITs) that are closely connected to the tech industry. American Tower (AMT 0.69%), Digital Realty Trust (DLR 0.89%), and Americold Realty Trust (COLD -0.56%) will all likely benefit from the long-term secular uptrend in e-commerce and technology, but because they own real estate, they likely won’t have the same level of volatility and risk as tech stocks.
1. American Tower
American Tower is down about 15% year to date (YTD). It is an infrastructure REIT that owns 5G cell towers and data centers in 22 countries. In total, it owns about 221,000 communications site across the globe.
In a typical site, the REIT leases the ground from a third party, like a farmer or someone else who owns the land, and spends about $275,000 building the tower. It earns $20,000 per year in rent from one tenant and spends about $12,000 in operating expenses.
That said, $8,000 in profit per year is a return of just 3%. The real returns come in when American Tower can bring in more tenants to the site. Each additional tenant can add as much as $30,000 in profit with no additional costs.
In addition to the tower sites, the REIT currently owns 27 data centers and 1,800 distributed antenna systems, and 25 of those data centers came from this year’s acquisition of CoreSite Realty for $10.1 billion. CoreSite’s data centers are strategically located across eight big cities in the U.S., and American Tower plans to use CoreSite’s expertise and its own international expertise to expand that business across the world.
Even though tech stocks have taken a hit this year, e-commerce and technology businesses are still growing. American Tower grew revenue 22% from Q1 2021 to Q1 2022. As tech continues to grow, businesses will continue using American Tower, and it can increase its tenants without having to simultaneously increase its costs much.
2. Digital Realty Trust
While American Tower is dipping its feet in the data center waters, Digital Realty is a seasoned veteran. It owns data centers in 50 cities across the world and has over 4,000 customers. Unfortunately, its stock has been thrown out like the proverbial baby with the bathwater, down about 25% YTD.
While tech stocks have fallen for legitimate reasons, like valuation, Digital Realty still has an extremely valuable asset base. Its millions of square feet of rentable space cost over $26 billion to acquire. While it is required to record that real estate at cost on its balance sheet, it’s likely that many of those properties are now worth far more than the REIT paid.
Digital Realty currently trades for 2.2 times book value, and its five-year average is 2.9 times. Book value in the price/book ratio is based on Digital Realty’s balance sheet, which states property at cost. Assuming that those property values have increased, along with the real estate market, the current p/b could very well be below 2. Potential reversion to the historical average of 2.9 times would give the stock a lot of room to run.
Digital Realty still has plenty of earning power too. Its Q1 2022 funds from operation (FFO) were in line with Q1 2021. Total FFO in 2021 came in at $6.36 per share. That means the stock is trading for 20.9 times FFO. That number is right in line with the index, which is around 21.
3. Americold Realty Trust
At first glance, Americold seems to be the black sheep here. Where American Tower and Digital Realty store data and work with tech companies, Americold stores something different: cold meat.
Americold is an industrial REIT that specializes in cold storage of food products. It manages 250 temperature-controlled warehouses worldwide and owns 190 of those. In addition, 201 of the warehouses are located in the U.S., with the remainder mostly in Europe and Australia.
Americold should have benefited strongly from the pandemic, as online grocery shopping hit its peak during that time. It is the go-to warehouse for cold storage in the U.S. and manages the warehouses of several big-name companies. Instead, its stock is down close to 35% over the past year.
Like many other companies, Americold’s stock was hit by supply chain issues. Even in the face of rising consumer demand, the inability of food suppliers to create new products meant a decline in occupancy. Revenue was up 34.6% in 2021, but same-store growth was just 0.3%. That means all the growth came from acquisitions.
The good news is that the stock has a fairly solid base where it is now. The dividend yield is 3.5%, and it trades for just 1.7 times book value.
Going forward, the REIT is set up to benefit from e-commerce growth. According to management, normal same-store sales growth is between 2% and 4%, and net operating income grows a percent or two higher than that. When the supply chain issues totally subside, that number should be even higher. Additionally, the REIT is expanding its international operations, which may help it with a U.S.-based supply chain issue in the future.
Tech with tangible assets
None of these three REITs were insulated from the drop in tech stocks this year. Each has fallen this year, and Americold’s stock has been declining for longer than that. The difference is assets. Where many tech stocks major in intangible assets, these three REITs pair intangible expertise with tangible real estate assets that should set a floor on the stock price. When tech recovers, you can expect these stocks to recover with it, but until then, you can stay patient and collect dividends.