There are many ways to invest in real estate without buying a property. One of the easiest is to purchase shares of a real estate investment trust (REIT). These real estate stocks enable you to benefit from the income and price appreciation of the properties they own.
Equity Residential (EQR 0.96%) and Digital Realty (DLR 0.67%) are two top REITs. Here's a closer look at why some investors might favor one of these top-tier REITs over the other.
Betting on good management no matter what the market does
Mike Price (Equity Residential): Equity Residential founder and chairman Sam Zell made a name for himself (and billions of dollars) during the inflationary downturn of the 1970s. His propensity for picking up buildings in extreme distress earned him the nickname "The Gravedancer." Zell doesn't hold the reins anymore at Equity Residential, but he is still active in the business and is influential over strategy.
We haven't officially entered a recession, and the Fed is actively working on controlling inflation -- both of those points are better for real estate owners than what happened in the 70s -- but anything can happen. The S&P 500 still trades for a cyclically adjusted price-to-earnings (P/E) of 29, well above the long-term average of 17. Interest rates (after being held artificially low for decades) still have a long way to go upwards, and incredibly high gas prices are wreaking havoc on the supply chain.
There's probably a 50/50 chance that the economy enters a full-blown recession this year. If it does, you want Zell's influence in your investments.
On the other hand, the economy and stock market bounced back pretty quickly after the pandemic recession. Many stocks bounced back quickly after the Great Recession, and many stocks weren't even affected by the dot-com bubble bursting. It's certainly possible that the market will be in a lot better situation a year from now. If that happens, would you still want to own Equity Residential?
I say yes. The residential REIT is in the middle of a portfolio transition that will set the company up for better growth and higher-quality assets in the years to come. It is selling buildings in coastal geographies like New York and California and reinvesting the proceeds in newer buildings in higher-growth markets, such as Denver, Atlanta, and Dallas.
Finally, a bad year for the whole industry has driven the stock price down to rarely seen undervalued levels. The P/E of 20.61 is far below the five-year average of 33.76. The dividend yield of just under 3.5% is also higher than the five-year average. The market doesn't often give us the chance to buy Equity Residential at a bargain price, but it is right now.
A real estate megatrend
Matt DiLallo (Digital Realty): Digital Realty enables real estate investors to participate in one of the biggest megatrends in decades: Data proliferation. Digital transformation is taking more business processes online, driving enormous growth in data usage. The company's data centers serve as hubs for this information flow.
Demand for space in the data center REIT's facilities is robust. The company delivered record bookings in the first quarter, keeping capacity filled in its existing data centers while enabling the company to continue moving forward with new developments. Digital Realty had 44 projects underway at the end of the first quarter -- a record high for the REIT -- with 58% of this capacity already presold. That should drive growth as the company finishes those projects in the coming years. Meanwhile, it continues to acquire more land to support future developments.
Digital Realty also continues to expand its platform by making acquisitions. It purchased a majority stake in Teraco earlier this year, establishing a presence in Africa. That positions the REIT for future expansion as data usage grows on that continent.
Digital Realty's continued growth should support its attractive 4.1%-yielding dividend. The company has increased that payout every quarter since its initial public offering in 2004, giving it a 17-year growth streak. Overall, Digital Realty has grown its payout at a 9.8% compound annual rate over the years.
Digital Realty stands out as a unique real estate stock because of its leverage to the data proliferation megatrend. That makes it a higher upside opportunity for investors seeking above-average growth in the real estate sector, along with a compelling income stream.
Value versus growth
Equity Residential and Digital Realty both have appealing characteristics, which could make one a better buy than the other, depending on an investor's preference. Given Equity Residential's heritage and valuation, it will likely be a more appealing buy for value-conscious investors. Meanwhile, Digital Realty's leverage to the data proliferation megatrend makes it more compelling to growth-focused investors.
