AAs an income and value oriented investor, I am constantly on the lookout for undervalued stocks that have the potential to grow while paying a reliable dividend. Real estate investment trusts (REITs) are some of my favorite stocks to buy because they provide exposure to various real estate industries while paying above-average dividend yields.
The bear market, fueled by concerns about inflation and rising interest rates, has been tough on REIT stocks. Right now is a good time to load.
Two good deals REITs I resume in the stock market plunge are iron mountain (NYSE: MRI) and Extra space storage (NYSE:EXR). Here’s a closer look at both and why I’m adding or starting my position in these stocks today.
1. Iron Mountain
Iron Mountain is a specialty REIT that has been helping customers store and organize physical records, assets, data, files, and specialty products like fine art since 1951. That may not be the business the most exciting, but it is consistent and has high demand.
Its expansion into select global markets, along with its fine art business and global data center space, has enabled it to create new revenue streams and achieve new heights in revenue growth. In the first quarter of 2022, revenue reached $1.25 billion, a new quarterly high, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased by 13% over the previous year to reach $431 million.
Iron Mountain’s small but notable footprint of 20 data centers with 176 million megawatts of data center space for lease is one of the reasons I’m so excited about its future, because I think demand for physical and digital data space will only continue to grow. After several public REITs and private equity firms went shopping in 2021, the options in this area are dwindling. This makes Iron Mountain’s move into the digital space all the more appealing.
The company is currently enjoying an attractive dividend, which is just over 5%, and its shares are trading at a bargain price of 10 times its operating funds (FFO), a key indicator of REIT performance. By way of comparison, its two main data center peers, equinix and Digital Real Estate Trust, are trading at around 26 and 12 times FFO, respectively.
2. Extra space storage
Self-storage is another industry that may not deliver the excitement factor, but certainly delivers in terms of profitability and reliability. Self-storage has been the best performing sector in the REIT industry for the past 25 years, with Extra Space Storage delivering an annualized return of 20.41% since its IPO in 2004.
Currently, the company has interests in, owns or manages over 2,100 properties located in over 995 different cities in 41 states, but there is an opportunity for growth. The self-storage industry is highly fragmented, with approximately 42% of institutional-grade facilities owned by individual investors. Extra Space is targeting these existing facilities by acquiring them through joint venture partnerships or buying them outright.
Extra Space Storage is also the largest third-party management company for the storage industry in the United States, with its management division accounting for approximately half of its real estate portfolio. Diversified revenue streams are a major strength, and the management operation has become one of its main sources of new acquisitions. In 2021, managed properties accounted for 55% of its acquisitions. I like the resilience of its business model and how it can maintain stable performance even in a down economy.
Its debt is at its lowest point in more than seven years, with a debt-to-EBITDA ratio of 4.5 times with $65 million in cash and cash equivalents on hand. Recent market volatility has hit the stock rather hard, sending it down 24% year-to-date, but the drop has also made its shares much more attractive. Right now it is trading at around 20 times FFO with a dividend yield of almost 3.6%. It might not sound like a bargain, but self-storage REITs have been trading at over 30 times their FFO in recent years, which means the current price is a noticeable discount.
I already owned shares of Extra Space Storage and will use the market drop to add to my position.
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Liz Brumer Smith has positions in Digital Realty Trust, Equinix, Extra Space Storage and Iron Mountain. The Motley Fool holds positions and recommends Digital Realty Trust, Equinix and Iron Mountain. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.