Real estate investment trusts (REITs) have hardly been immune to the stock market downturn, but there's also reason for optimism in the form of a key metric for this industry.
According to data from the Nareit trade group, REIT earnings as measured by funds from operations (FFO) jumped about 31% from the first quarter of 2021 to Q1 2022 to a record high of more than $18 billion.
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FFO measures cash flow generated from business operations -- the cash that REITs use to meet their requirement to pay at least 90% of their taxable income in dividends -- and is considered a more accurate reflection of a REIT's profitability than net income and earnings per share.
A good measure of how the market is valuing a REIT is the price/FFO ratio. Here are three REITs that have made their shareholders a fortune since the Great Recession. They've each beaten the S&P 500 in total return -- which includes share-price growth and dividend payouts -- and they have price/FFO ratios that point to them being perhaps particularly good values right now, especially given their business prospects going forward.
ADC Total Return Level data by YCharts.
1. Digital Realty
Digital Realty (DLR 0.12%) owns and operates more than 290 data centers in 26 countries on six continents. This company's payouts have grown with the rapid expansion of cloud computing, e-commerce, and web services, and a $10,000 stake put down at this point in 2007 would now be worth a cool $62,250.
While it continues to grow its operations and revenue streams, including a recent move into the burgeoning African market, Digital Realty stock has been punished of late, perhaps from guilt by association with the tech sector. Its share price is down about 22%, and it looks like a real bargain with a ratio of price to trailing 12 months of FFO of about 13 times. That's about half that of its larger data center REIT rival Equinix, which right now has a price/FFO ratio of about 27X.
Adding to Digital Realty's attraction is a record of 19 straight years of dividend increases and a current yield of about 3.6%. A client list that's a who's who of big data consumers also makes this essential provider of digital infrastructure a good prospect for years of growing shareholder payout and price appreciation.
2. Agree Realty
Agree Realty (ADC 1.31%) is a retail REIT that has not only outperformed its competitors in this sector through the pandemic but the greater market as well. Stock in this owner of 1,510 properties in 47 states is down only about 3% year to date compared with about 12% for the S&P 500, and in the past 15 years Agree has provided a total return of 380%, compared with 266% for the greater market.
The company is helmed by the son of the founder, who himself remains as board chairman, which is a nice sign of alignment with shareholder interests -- for instance, a 6.5% increase in dividends over the past three years. And its portfolio is on the grow, with 290 acquisitions in 2021 and another $1.3 billion or so budgeted for more expansion this year.
Agree's price/FFO ratio of about 18.4X is a bit lower than Realty Income, this REIT sector's bellwether, at 19.6X. And even with its relative share price strength, it's still yielding a nice 4.07%, well above the S&P average of about 2%.
3. American Tower
With a market cap of about $115 billion, American Tower (AMT 0.17%) is one of the largest of all REITs and since becoming the first major U.S. tower company to go public (in 1998) has delivered a market-crushing total return of nearly 1,700%.
Steadily rising demand for access to its growing network of more than 220,000 communication sites in 25 countries on six continents should keep the profits flowing. American Tower also bought a data center REIT of its own -- CoreSite -- to build its presence as an integrated communications real estate company.
American Tower stock also has been beaten down some and is now about 14% off year to date, but a price/FFO ratio of 21 shows it could still be a bargain. The company also has increased its dividend for 13 straight years, including by more than 18% in the past three years, and the stock is now yielding about 2.1%.
Great companies with growing businesses make these stocks wealth-builders for years to come
Buying great companies and hanging on to them as long as that description still fits is a time-proven recipe for building wealth. Each of these REITs has proven that maxim, and they each also have the portfolios and prospects to continue building on their outstanding performance records.
I own Digital Realty and Agree Realty now and plan to add to them. I used to own American Tower and probably sold it too soon after a few years of particularly strong share growth. I may buy it again soon.
