Remember when real estate investment trusts (REITs) were highly correlated? That meant if REITs were going higher, then all REITs went higher.
It turns out, not all REITs are alike. And the best REITs to buy today are standouts in troubled times.
The same economic forces that drove apartments moved hotel REITs.
If it was good for the economy, it was good for almost all REITs.
The COVID-19 pandemic has changed that.
2020 is the year we found out that not all real estate is alike.
The shutdown to halt the virus’s spread has destroyed some parts of the REIT industry while providing significant tailwinds to other subsectors.
Malls, as we know them, are dead.
Hotels will take a long time to recover, and many of them will not survive the journey.
Office usage, especially in big cities, will change as a result of work from home policies.
Bottom fishing in the sectors that have been hit the hardest by the pandemic is a high-risk game that is probably best avoided by most investors. As malls and hotels go into default, this will become a distressed debt game with very little, if anything, left for equity holders.
Instead, investors should focus on those sectors that have massive tailwinds from the pandemic.
This REIT Pays 6%
Plymouth Industrial REIT Inc. (NYSE: PLYM) is an industrial REIT that should see above-average long-term growth due to the remaking of the supply chain in the United States. Plymouth owns 130 industrial buildings with approximately 20.8 million square feet across 11 states.
It is not chasing the same industrial properties as its competitors. Plymouth is focusing on properties in secondary markets that can be acquired on more favorable terms. It wants to own properties where the tenants are in industries that can benefit from an improving U.S. economy and realignment of supply chains.
It is looking to buy both single- and multi-tenant properties in markets in the United States’ industrial, distribution, and logistics corridors. The company prefers markets with a large pool of skilled blue-collar workers to meet the need for its logistics-oriented tenant base.
At the current price, the company is trading at about half of the estimated net asset value of the properties that Plymouth Realty already owns. Plans call for it to expand by buying about $200 million worth of new industrial assets every year for the next several years.
In addition to the discount to net asset value, Plymouth trades at a lower multiple of cash flow than similar REITs. The shares currently trade for about seven times funds from operations (FFO). Similar REITs trade close to 11 times FFO right now.
The upside potential over the next year ranges from about 65% to 100% based on the FFO and NAV discounts.
Plymouth Realty shares are currently yielding over 6% at a price of $12.
The REIT That Does Everything
Iron Mountain Inc. (NYSE: IRM) is the largest information storage and management REIT. This REIT has 85 million square feet across 1,400 facilities in over 50 countries, with more than 225,000 customers.
It does business with almost all of the Fortune 100 companies. It is the go-to company for physical document storage all over the world.
What does physical data storage have to do with tailwinds from the pandemic?
Companies will need shredding services available for employees’ homes.
Iron Mountain does that.
Paper work product is going to need to be digitized.
Iron Mountain does that.
Remote workers will need safe, secure data backup.
Iron Mountain does that as well.
There are several ways that work from home is going to create higher demand for Iron Mountain’s services.
That’s not the big story.
Iron Mountain is also in the data center business. It helps companies use data centers to move into the more digital world that the pandemic has created.
There are a lot of data centers popping up all over the world as demand is rising. Iron Mountain has a huge advantage over its competitors in that it already has an excellent relationship with 225,000 potential data centers around the world.
Iron Mountain’s $25 shares are yielding over 9% right now. Combined with the potential for high cash flow growth stemming from the growing data center business, the long-term total return potential for this REIT is enormous.
The Best REIT to Buy Today
The pandemic has caused a housing boom in the United States. There were not enough new homes to meet demand before the crisis began. With people fleeing big cities to get away from the virus and civil unrest, home demand continues to skyrocket.
That’s going to be fantastic news for REITs that provide sawtimber that can be turned into lumber for the housing industry.
For most of its existence, CatchMark Timber Trust Inc. (NYSE: CTT) has produced much more pulpwood than sawtimber. That is changing, and the company expects the product mix to shift with sawtimber being more than half of the product mix.
Higher margin sawtimber stakes should drive higher cash flow and dividends.
CatchMark shares may be volatile around earnings, but the long-term total return potential is enormous for this REIT. Investors should treat any price weakness as a buying opportunity.
At the current price of $8.55, shares of CatchMark yield 6.5%.
— Garrett Baldwin
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Source: Money Morning