The current inflationary environment has flipped the stock market upside down. Former high-fliers such as big tech and software-as-a-service stocks have tanked. Meanwhile, sectors that were left for dead, such as energy, have become the new leaders.
One potential big winner from this paradigm shift, real estate, hasn’t yet taken off. Indeed, the iShares US Real Estate ETF (NYSEARCA:IYR) is actually down 10% over the past 12 months. This might be a surprise, given that real estate investment trusts (REITs) tend to benefit in a rising interest rate and highly inflationary environment, such as we currently face now.
However, the real estate ETF’s underperformance highlights a key point: Not all REITs are created equal. Some categories, such as malls and offices, are not well-equipped for the post-pandemic economic landscape.
Other REITs, however, are set to prosper and have substantial upside from today’s prices. These are seven undervalued REITs to buy before they take off.
|IIPR||Innovative Industrial Properties||$114.8|
|DLR||Digital Realty Trust||$125.22|
American Tower (AMT)
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American Tower (NYSE:AMT) is the worldwide leader in owning and operating telephony sites. The tower operator has delivered sky-high returns over the years thanks to the insatiable demand for mobile voice and data services.
To put a number on it, $10,000 invested in AMT stock 20 years ago would be worth more than $800,000 today.
While it might be tempting to think American Tower’s best days are already behind it, the company has plenty of growth left. Emerging markets such as Latin America and Africa retain significant opportunities for more mobile network usage.
Additionally, the rollout of 5G, connected autos, and other such data uses will push more mobile demand even as smartphones become a fully-mature market.
Crown Castle International (CCI)
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Crown Castle (NYSE:CCI) is another big player in the telecommunications REIT space. In contrast to American Tower, it has focused more on small site locations rather than the traditional large tower facilities.
While there’s a reasonable debate to be had over which approach is better, there’s more than enough growth for both firms; indeed, both have posted double-digit compounded growth rates in recent years.
CCI stock is down 18% over the past year, and is off almost 23% on a year-to-date basis. This comes even as the company has continued to grow both its top-line revenues and its dividend payments.
And like with American Tower, things such as connected cars and the internet of things will continue to power more demand for Crown Castle’s services.
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CubeSmart (NYSE:CUBE) is a leader in the self-storage REIT sector. Self-storage has historically outperformed most of the other sub-sectors within the REIT space. Counterintuitively, self-storage can actually benefit from a weaker economy, as people need more temporary space when they are forced to change their current housing situations due to job loss or other hardships.
Self-storage also wins during inflationary conditions. Operators typically rent out self-storage units on a month-to-month basis, making it easy to increase prices quickly. That’s in stark contrast to buildings such as offices where rental contracts are set on a long-term basis.
Even with favorable dynamics for the self-storage industry, individual operators have gotten hit hard in 2022. CubeSmart — which is attractive thanks to its smaller size and faster growth outlook — has dropped from $57 to $39. That puts shares at a solid 18 times funds from operations (FFO) and has put the dividend yield up to 4.38%.
Life Storage (LSI)
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Self-storage is a great opportunity in the current market, making it worth putting another sector peer on a best REITs list. Like CubeSmart, Life Storage (NYSE:LSI) has taken a tumble lately. Just since March, LSI stock has slumped from $150 to $103.
Part of the sell-off is due to the same factors hitting other self-storage REITs, such as concerns over higher costs of capital amid rising interest rates. However, Life Storage in particular has sold off due to its e-commerce logistics business.
Life Storage, in addition to its traditional self-storage operations, offers warehouses and related e-commerce fulfillment logistics for online retailers. Given the slowdown in e-commerce in recent quarters, some analysts have downgraded LSI stock due to this exposure to online retail.
However, this should be a buying opportunity; e-commerce remains a huge long-term growth vehicle, though 2022 may admittedly be soft compared to a record 2021.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is one of the most unique REITs out there. It specializes in owning marijuana cultivation facilities. A decade ago, the idea of a publicly-traded greenhouse owner might have sounded strange.
However, Innovative Industrial has filled a unique hole in the market. Due to cannabis being illegal on a federal level, most banks won’t lend to marijuana companies. But, being a new industry, the cannabis growers need access to tons of capital. Innovative has stepped in; it obtains capital from the equity market and provides it to the cannabis farmers via high-priced leasing arrangements for its greenhouses.
The fat spread between what Innovative pays for capital and what its greenhouse tenants pay to operate their cultivation facilities has generated a flood of cash flow. IIPR stock has soared hundreds of percent since going public, and it also pays out a compelling 5.96% dividend yield.
There’s some risk here if and when the federal government legalizes cannabis entirely. However, as long as that doesn’t happen, IIPR stock should be set for more strong gains ahead.
Equity Residential (EQR)
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Equity Residential (NYSE:EQR) is one of the country’s largest apartment owners. It controls more than 300 unique properties that contain nearly 80,000 apartments in aggregate. Equity Residential has made a focus of developing properties in top-tier markets such as Boston, New York, and San Francisco.
As you can imagine, this has been a highly-profitable area of the REIT market in recent years. Rents have been soaring, in tandem with housing prices, over the past 24 months. As a result, apartment owners such as Equity Residential have been able to push through sizable rent increases.
This is bad news for people looking to rent a new apartment. For investors seeking to defray the high cost of housing, however, EQR stock could be just the ticket. In addition to its strong share price appreciation in recent years, EQR stock also offers a respectable 3.6% dividend yield.
Digital Realty Trust (DLR)
Digital Realty Trust (NYSE:DLR) has become the leader in a niche of REITs devoted to data centers, data storage, processing, and related services. DLR stock was one of the stars of the REIT market prior to the pandemic; DLR stock tripled between 2014 and 2020.
Since then, however, Digital Realty shares have merely traded sideways as investors have left tech growth-related stories aside in favor of commodities and economic reopening plays.
However, the long-term growth story for data centers and digital communications hasn’t gone anywhere. Like with Life Storage facing short-term headwinds in e-commerce, Digital Realty has underperformed due to investors fretting about demand over the next few months.
For investors with a longer time horizon, however, now is the time to be picking up DLR stock. Shares currently yield 3.7% in addition to offering strong growth prospects.
On the date of publication, Ian Bezek held a long position in AMT and CUBE stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.