The new year is off to an interesting start. The record number of confirmed coronavirus cases due to the highly contagious omicron variant, as well as inflation concerns, have created a lot of volatility in the stock market. The S&P 500 is down 9% as of this writing, and there's a fair chance this could be the start of a market correction or possibly something much bigger.
Given the uncertainty, it's important that investors carefully select their investments, identifying companies that can withstand the ups and downs of market volatility and thrive even in challenging economic conditions. This is exactly why Digital Realty Trust (DLR 0.67%) and American Homes 4 Rent (AMH 1.07%) are two of my top real estate investment trust (REIT) stocks to buy right now.
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Data demand is recession-proof
If the pandemic showed us anything, it's that data is as close to a recession-proof industry as there is. Everyone from corporations to individuals rely heavily on technology to serve home, work, and recreational needs. Things like e-commerce, cloud-based storage, video conferencing, business-software systems, social media, streaming services, gaming, and now the metaverse all require a heavy amount of data use and storage. All this makes companies like Digital Realty Trust, a data-center real estate investment trust (REIT), critical businesses today.
Digital Realty Trust owns or has an interest in roughly 280 data centers in 50 metro areas around the world. The past few years have been exceptionally strong for the company as demand for data needs increased. Funds from operations (FFO), a metric that functions similarly to earnings per share for REITs, grew 32% for the nine months ended 2021. Net income during that same time jumped 116%.
So far this year the share prices are down 14%, undoubtedly related to market volatility rather than actual performance concerns with the company. Depending on where the market goes, share values for the company may trend lower this year, but its business model likely won't. This makes it a great pick in the market today.
Image source: Getty Images.
Safety in rental real estate
Despite market volatility and concern over rising interest rates and high inflation, lack of inventory is still driving up home prices and residential rental rates. This has been a boon for American Homes 4 Rent, one of the premier residential REITs that owns and leases rental housing across the country. As of Q3 2021, AMH had interests in or ownership of more than 56,000 homes in 22 states, of which over 97% of its homes are occupied.
Net income increased 42% for the nine months ended 2021, adjusted FFO grew 19%, and rental revenues jumped 10.3% year over year.
Long-term sustainability as it relates to the fast-growing rental and housing markets is a concern and something that could impact AMH in a negative way in the coming years, but there's still safety in rental housing. People will always need a place to live. Recent shifts in tenant preferences toward single-family homes give American Homes 4 Rent an advantage compared to other residential REITs. Its debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio, a metric that evaluates its debt as it relates to income and assets, is 5.3-to-1, which is less than its closest competitor, Invitation Homes, and just slightly higher than the REIT standard of 5. Like Digital Realty, the shares have take a hit and are down about 12% in the new year.
Both of these REITs are worthwhile picks right now. Market volatility doesn't change the fact that demand for the companies' services isn't going anywhere in the future. It just means investors can pick up shares at a slight discount from record highs.
