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3 Cheap REITs to Buy Right Now


Dec 20, 2020 by Matt Frankel, CFP
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Real estate was one of the most beaten-down sectors as the COVID-19 pandemic swept across the United States. This certainly made sense, as many types of commercial real estate rely on the willingness and ability of people to physically go places. So it also makes sense that real estate has been one of the biggest winners of the vaccine-fueled rally. Since Pfizer (NYSE: PFE) initially announced its vaccine was over 90% effective in early November, the real estate sector is up by 7%, compared with a gain of about 5.5% for the S&P 500.

Even after the recent rally, there are some real estate investment trusts (REITs) that still look very cheap, especially for patient long-term investors. These three in particular could be worth a closer look right now.

This 'stay-at-home' REIT has underperformed

Unlike many other REITs, Digital Realty Trust (NYSE: DLR) actually benefited from the pandemic's disruptive effects on life in the United States. The company is one of the largest owners and operators of data centers in the world. When millions of people were forced to work remotely for the first time, people were relying on Zoom (NYSE: ZM) to interact with friends and family, and more content was being streamed than ever before, the volume of data flowing around the world soared.

However, since the vaccine news was released, Digital Realty has underperformed, with shares down by more than 11% since the initial Pfizer vaccine news. And to be fair, it could see a temporary decline in data traffic (and therefore, data center demand) as the world starts to normalize in 2021. But this is likely to be a short-lived trend. Data usage is a long-term uptrend, and the gradual rollout of 5G technology in the coming years should be a big catalyst.

This office REIT still looks cheap, and management agrees

Empire State Realty Trust (NYSE: ESRT) has been one of the best performers in the vaccine rally. Not only does the company own a portfolio of New York City office buildings (including the Empire State Building) that very few people are currently working in, but Empire State also operates the observatory on top of the building that has been a must-do NYC tourist attraction for years. So, the stock has rallied by 80% since the vaccine news initially came out because the company has a lot to gain from the world getting back to normal.

However, the stock could still be cheap from a long-term perspective. It's still down 30% this year, and there's uncertainty related to the speed of the vaccine rollout and actual economic rebound still priced into the stock.

Management seems to agree the stock is still very cheap -- instead of reinstating its dividend, Empire State's board just authorized a new $500 million stock buyback plan, an extremely aggressive amount for a company with a market cap of less than $3 billion.

A legacy business but lots of growth potential

Iron Mountain (NYSE: IRM) is best known by most Americans for its mobile document shredding trucks you've probably seen driving around. But its core business is records storage -- it owns a massive portfolio of storage facilities designed to provide secure environments for companies to store sensitive documents. Indeed, 95% of the Fortune 1000 uses Iron Mountain's services, and it has a presence in 50 countries all over the world.

However, the need for physical records storage is likely to decline over time as even the most sensitive types of records gradually become digitized. So Iron Mountain's core business is likely to slowly decline over the next couple of decades, which is why the stock trades for less than 13 times trailing 12-month FFO.

On the other hand, Iron Mountain knows its business isn't going to be a long-term growth driver and is slowly getting into the data center business in order to take advantage of the digital transformation. If Iron Mountain can successfully pivot to a digital-focused business in the coming years, it could be a big win for the company's shareholders.

Great opportunities, if you're patient

To be perfectly clear, I have absolutely no idea what these three REITs will do in the near term. And nobody else does, either. But these are three well-run businesses capable of producing market-beating returns as the world returns to normal and long-tailed technology trends play out. So if you measure your investment returns in decades rather than months, these could be excellent additions to your portfolio.

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Matthew Frankel, CFP owns shares of Digital Realty Trust, Empire State Realty Trust, and Iron Mountain. The Motley Fool owns shares of and recommends Digital Realty Trust and Zoom Video Communications. The Motley Fool recommends Empire State Realty Trust. The Motley Fool has a disclosure policy.