In the world of real estate investment trusts (REITs), the biggest and most dominant operator in the respective sector tends to get the most attention. Most investors flock to companies like Realty Income, Prologis, Innovative Industrial Properties, or Public Storage (PSA 2.92%), but they aren't the only worthwhile REIT investments in the market today.
Several under-the-radar REITs have strong historical performance and are backed by exceptional growth opportunities while trading at far less of a premium than the "big name" REITs. Here's a closer look at the top three REITs most investors don't know about and why you may want to consider adding them to your portfolio in 2022.
Switch (SWCH) isn't actually a REIT -- well, not yet. The data storage operator announced in late 2021 its plan to convert to a REIT to gain more favorable tax benefits. The switch won't take place until early 2023, meaning there's a notable period of lag time in between, but it doesn't negate the potential the company has in the meantime.
Currently, Switch operates 16 data centers across six campuses identified as the "Five Switch PRIMES." These PRIMEs are in distinct geographic locations of the U.S to provide the company diversified market share for data storage within key latency zones. Switch has 11,080,000 square feet of planned or active development underway, which should add 13 new data centers to its portfolio over the next one to five years. The Citadel, its campus in the Tahoe Reno area, is designed to be the world's largest data center environment once completed.
The company's financials aren't perfect, but they are improving and heading in the right direction. Year-over-year revenue increased 22.8% in the third quarter of 2021, and the company finally broke even, having a net loss per share of $0.00, an improvement from the quarter and year prior. When the company converts to a REIT, it will be just one of three other data center REITs. Switch's growth potential is what makes it a standout buy, despite floating under the radar today.
2. Plymouth Industrial REIT
Plymouth Industrial REIT (PLYM 1.39%) is the definition of an up-and-coming REIT. The company, which specializes in the operation and leasing of warehouse and distribution facilities as well as small-to-midsize light industrial and small-bay industrial spaces in second-tier markets, is slowly starting to make its way onto the map.
In November 2021, Plymouth was added to the MSCI US REIT Index, which represents roughly 99% of all U.S. REITs, including some of the largest industrial operators and REITs by market cap. It also has outperformed all other industrial REIT peers over the past three years and outpaced the S&P 500.
Like Switch, the company isn't hugely profitable today, but its financial metrics are improving and growing at a significant rate. Year-over-year (YoY) revenues have risen nearly 30%, while net loss per share improved 47% in the same time frame. Not to mention the company is currently trading at 18x its price-to-FFO (funds from operations), which means it's notably undervalued as it relates to its current financial performance. Given the nature of its business model and the unique niche it serves in the industrial sector, I see Plymouth quickly jumping on investors' radars in the coming year and beyond.
Safehold (SAFE 3.67%) is one of the unique REITs in the market today because, unlike traditional equity REITs, Safehold leases undeveloped land to developers or business owners using a long-term ground lease. Ground leases, which can last several decades, are in first position, superseding even a mortgage, making this one of the safest investments within the real estate industry.
Year-to-date, the company's earnings per share increased 37% and increased revenues by 24% YoY. It also created $321 million in new ground lease investments, while pushing net income up 43%. Safehold is a subsidiary of iStar (STAR 3.60%), which is a commercial mortgage/equity REIT hybrid. iStar established Safehold in 2017, taking it public as a REIT in early 2020. Since then, it's provided a 37% return to investors on an annualized basis. Safehold's incredible performance, solid credit rating, low debt profile, and diversified portfolio make it stand out as a top REIT in 2022, despite being under the radar by most investors.
These won't be under the radar for long
All three of these picks are solid REITs for the coming year backed by high-demand industries that have proven resiliency and strength amid the last year and a half of economic instability. Given their current performance and growth opportunities, it's unlikely they'll stay under the radar for long.