2 real estate stocks too cheap to ignore

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 arise when a stock’s price is far removed from its fundamentals and tainted with pessimism.

Down 31% and 37% since the start of the year, respectively, Digital Real Estate Trust (DLR -0.45%) and Simon Real Estate Group (GPS -1.27%) are two real estate investment trusts (REITs) with stronger fundamentals than their recent performance suggests. For context, it’s much worse than the S&P500 17% drop in the index during this period. Let’s take a look at each REIT.

1. Trust in digital real estate

Which innovation of the past 70 years has revolutionized the world more than any other? I would say the answer is mainframe computers, which are now known as data centers. Without data centers, the modern economy as we know it would not exist.

Everything from online shopping to checking email to web browsing and video streaming depends on the ability of data centers to connect devices, process data and store it. And everyone can thank Digital Realty’s more than 300 reliable data centers around the world for stable access to the web and all its conveniences.

As the prevalence of e-commerce and video streaming continues to rise around the world, the demand for data centers will also increase. That’s why market research firm Allied Market Research predicts that the global data center industry will grow 10.5% every year, from $187.4 billion in 2020 to $517.2 billion. by 2030.

Since Digital Realty is already a big player in the data center market, the law of large numbers dictates that its growth will likely lag behind the industry as a whole. However, it is reasonable to expect that the company’s basic operating funds (FFO) per share will grow at least in the mid to upper figures every year for the foreseeable future.

Digital Realty offers passive income investors a dividend yield of 4%, which is well above the 1.6% yield of the S&P 500 Index. 2022, the dividend is safe and should grow as fast as the basic FFO per share.

And due to the massive drop in Digital Realty’s stock price over the past few months, the stock’s valuation has become intriguing. Digital Realty trades at a futures price/core-FFO ratio per share of just 17.9, which is a bargain for a leader in an up-and-coming industry, in my opinion.

Image source: Getty Images.

2. Simon Real Estate Group

What’s the first word that comes to mind when you think of shopping malls in this so-called golden age of e-commerce? Outmoded? Maybe prehistoric? The world’s largest shopping center owner, known as Simon Property Group, has worked to dispel these misconceptions. As of June, the REIT wholly or partially owned interests in more than 200 commercial, restaurant and mixed-use properties in the United States, Europe and Asia.

Shopping centers have had to either adapt to the current environment or succumb to it. Shopping malls cannot compete with e-commerce without focusing on providing a unique consumer experience. While consumers can buy goods online from the immense convenience of the comfort of their own home, the novelty of high-end malls is still unmatched.

Simon Property Group understood years ago that the consumer experience had to be improved in order to survive and thrive. That’s why the company has been proactively adding exciting features to its malls in recent years, such as food courts, restaurants and aquariums.

At first glance, Simon Property Group’s 6.9% dividend yield appears to be a yield trap: too good to be true. But with the dividend payout rate expected to reach around 59% in 2022, Simon Property Group is definitely not a yield trap. And yield-oriented investors can buy shares of the REIT at a forward price/FFO per share ratio of just 8.6.

Kody Kester holds positions with Digital Realty Trust and Simon Property Group. The Motley Fool fills positions and recommends Digital Realty Trust. The Motley Fool recommends Simon Property Group. The Motley Fool has a disclosure policy.

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