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 in an effort to flatten the infection curve, many businesses temporarily closed. Stores that sold non-essentials were shuttered, and offices sat empty. As a result, significant numbers of those businesses were unable to pay their rents, and many of their REIT landlords, in the face of falling revenues, cut their dividends.
Not all REITs were in that position, however. These two, for example, have navigated the first two years of the COVID-19 crisis without major hits to their business models, and have longer-term growth catalysts, too. Let's take a closer look at these two stocks and see why they are a great buy right now.
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1. American Tower is a bet on the growing use of mobile data bandwidth
The cellphone tower leasing business is largely a duopoly dominated by American Tower (AMT 0.58%) and rival Crown Castle International (CCI -0.13%). Demand for mobile data has been growing rapidly over the past decade, and with the advent of 5G networks, that trend is expected to continue. For investors, American Tower shares are a play on that long-term trend of increasing mobile data usage.
American Tower builds cellphone towers and then leases space on them to wireless carriers such as T-Mobile US (NASDAQ: TMUS) and Verizon (NYSE: VZ), as well as to cable companies and governments. The leases are generally long-term and have periodic rent escalators built-in. The barriers to entry in this business are immense, and many of the best tower locations are already taken.
When it comes to its dividend, American Tower has an unusual streak going: It has increased its payout every quarter since 2012. At current share prices, its dividend yields about 2.2%. That's low for a REIT, but reflects American Tower's policy of reinvesting a significant share of its earnings back into the business.
2. Equity Residential is a bet on rising real estate prices
Equity Residential (EQR 1.62%) focuses on urban apartments for upscale professionals, with properties primarily located in Boston, New York City, Washington, D.C., Seattle, and across California. It chooses locales based on the concentration of knowledge industries represented among nearby employers, limited single-family housing stock, and the limits those communities face when it comes to building more.
Most of the cities where it owns apartment complexes -- especially in California -- have significant shortages of housing, especially when it comes to affordable single-family properties (i.e., starter homes). Between January 2021 and January 2022, U.S. home prices rose by around 18%, according to the Federal Housing Finance Agency's House Price Index (though the gains varied widely from region to region). According to data from Freddie Mac, average 30-year mortgage rates have increased from 3.04% to 5% over the past year in anticipation of the Federal Reserve's plans to increase benchmark interest rates from their near-zero pandemic lows back to more normal levels and tighten its fiscal policies.
The increases both in prices and mortgage interest rates have made buying a home less affordable, which will likely encourage more young professionals to stick to renting. That said, rents are rising as well. An analysis by Rent.com, for example, found that, nationwide, rents have increased by 22.5% over the past year. For an apartment REIT like Equity Residential, this is all good news. Their borrowing costs have largely been locked in at lower rates, and their operating costs are relatively stable. As such, increases in rent payments generally drop straight down to its 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 gauge their performance instead of earnings since they have a lot of depreciation, which misleadingly depresses their earnings figures.) Equity Residential also pays a dividend that, at current share prices, yields 2.8%. That, too, is on the low side for a REIT. However, it's because it is reinvesting steadily into growing the business. As rental prices rise, so should Equity Residential's earnings and dividends.
