As a group, real estate investment trusts (REITs) have been under pressure since the early days of the COVID-19 pandemic. As Americans largely stayed at home to flatten the infection curve, many businesses closed temporarily. Shops selling non-essential items were closed and offices were vacant. As a result, a significant number of these companies have been unable to pay their rents, and many of their REIT lessors have cut their dividends in the face of falling earnings.
However, not all REITs were in this position. These two, for example, weathered the first two years of the COVID-19 crisis without major losses in their business models and also have longer-term growth catalysts. Let’s take a closer look at these two stocks and see why they’re a good buy right now.
1. American Tower is a bet on the growing use of mobile data bandwidth
The cell tower leasing business is largely dominated by a duopoly American tower (Government office -1.82% ) and rival Crown Castle International ( IHK -1.15% ). Mobile data demand has grown rapidly over the past decade, and with the advent of 5G networks, this trend is expected to continue. For investors, American Tower stock is alluding to this long-term trend of increasing mobile data usage.
American Tower builds cell towers and then leases space on top to cell phone providers such as T Mobile USA (NASDAQ:TMUS) and Verizon (NYSE:VZ), as well as to cable companies and governments. Leases are generally long term and have built in regular rental escalators. The barriers to entry in this business are immense and many of the best tower locations are already taken.
When it comes to dividends, American Tower has been through an unusual streak: It’s increased its payout every quarter since 2012. At current stock prices, the dividend yield is about 2.2%. That’s low for a REIT, but it reflects American Tower’s policy of reinvesting a significant portion of its profits back into the business.
2. Equity Residential is a bet on rising real estate prices
equity housing (EQR -2.24% ) focuses on urban housing for the upper-class professional, with properties primarily located in Boston, New York City, Washington, DC, Seattle and throughout California. It selects locations based on the concentration of knowledge industries represented by nearby employers, the limited inventory of single-family homes, and the limits these communities face in building more.
Most cities that own apartment complexes — particularly California — have significant housing shortages, especially when it comes to affordable single-family homes (ie, starter homes). Between January 2021 and January 2022, U.S. house prices rose by around 18%, according to the Federal Housing Finance Agency’s home price index (although gains varied widely by region). According to data from Freddie MacAverage 30-year mortgage rates have risen from 3.04% to 5% over the past year in anticipation of the Federal Reserve’s plans to raise interest rates back to more normal levels from their near-zero pandemic lows and tighten fiscal policy.
The rise in both prices and mortgage rates has made buying a home less affordable, which is likely to encourage more young professionals to stick with renting. However, rents are also increasing. For example, an analysis by Rent.com found that rents rose 22.5% nationwide last year. For a residential REIT like Equity Residential, this is all good news. Their borrowing costs are largely locked in at lower interest rates, and their operating costs are relatively stable. Therefore, rent increases usually fall directly on the bottom line.
Equity Residential earned $2.99 per share in normalized funds from operations (FFO) last year. (Funds from operations is the metric REITs generally use to measure their performance rather than earnings since they have a lot of writedowns, which misleadingly depresses their earnings numbers.) Equity Residential also pays a dividend that’s 2.8 at current stock prices % results. That’s also rather low for a REIT. However, this is because it continuously reinvests in the growth of the company. As rental rates rise, so should Equity Residential’s profits and dividends.
This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are colourful! Challenging an investing thesis — including one of our own — helps us all think critically about investing and make decisions that help us be smarter, happier, and wealthier.