Several real estate stocks have shed a huge chunk of their value as the novel coronavirus pandemic led the world into a technical recession. With over 33 million Americans losing their jobs, property owners have had to either waive rent or scale it down to an acceptably low level.
Real estate stocks have yielded a loss of 1% in total returns compared to the S&P 500’s total return of 8.9% over the past 12 months. With lockdown restrictions easing across the U.S. and other countries, real estate markets have rallied a bit but are expected to remain sedated for the time being. However, some real estate stocks have remained resilient despite the crisis.
These stocks include the following:
With that in mind, let’s take a look at what makes each of these stocks stronger than the rest within the real estate space.
Real Estate Stocks: Digital Realty Trust (DLR)
Digital Realty Trust is a real estate investment trust (REIT) that owns and manages technology focused real estate properties in Britain and the U.S. With its recent acquisition of interconnection hub Interxion, the company has now expanded its reach to 275 data centers and 20 countries. DLR stock is currently yielding a return of 8.37% relative to the one-month returns from S&P.
Digital Realty has prioritized the interconnection of its asset base. This is perhaps why its asset base has grown by 24% in the past three years. Another reason DLR stock stands out from other real estate stocks is the company’s effective management of its capital structure. The total debt-to-asset metric for Digital Reality is reducing with each passing quarter. It’s now at 41%. Due to the capital-intensive nature of the business, having the right capital structure is imperative for success.
In its first quarter of 2020, the company reported revenues of $823 million. This was a 1% increase year over year and a 5% increase over the prior quarter. Interconnection revenues were the star of the first quarter with a 29% increase from the previous quarter. Moreover, with the rise of AI utilization, during Covid-19, the company has partnered with several data center edge companies such as Cisco (NASDAQ:CSCO) and IBM (NYSE:IBM). DLR’s ultimate goal is to provide lower latency hosting services to its clients.
Equinix is a REIT that provides colocation space and other related services to its clients. Over the years, the company has had a strong track record of integrating new assets in its data center ecosystem. Its three-year asset growth is at a staggering 23%, which is primarily due to its aggressive acquisition strategy. EQIX stock is currently yielding a return of 7.24% relative to the one-month returns from the S&P.
The company’s major and minor acquisitions have helped it expand its reach into different markets and strengthen its presence in the existing ones. Over the past decade, the company’s acquisitions have ranged from a $67 million Itconic deal to Telecity Group and Verizon’s (NYSE:VZ) datacenters, which collectively cost $3.6 billion. It has recently agreed to purchase 13 data centers from BCE (NYSE:BCE), Canada’s largest telecom company. The deal will help EQIX diversify its business into cloud and interconnection services.
Equinix recently reported its second-quarter results where revenues and EBITDA grew by 6% year over year. These include revenues from its recent acquisitions of Axtel and Packet. One of the most encouraging signs for the company is a 15% reduction in its leverage ratio, which is currently at 3.3x.
Omega Healthcare Investors (OHI)
Omega Healthcare is an equity REIT that owns a total of 985 skilled nursing and assisted living facilities across the U.S. and U.K. It operates through “sale-leaseback” agreements, where it purchases properties from an operator and leases it back to them. These agreements provide operators with rent and capital gains for the real estate itself. This translates into stable income in the form of dividends for shareholders. OHI stock is currently yielding a return of 6.57% relative to the one-month returns from S&P.
The company is highly leveraged with $5.5 billion in debt, which constitutes 56% of its gross assets. However, because its properties are lower-priced, it results in higher cash flows for the company than its peers. This is perhaps why it boasts a healthy free cash flow margin of 60.82.
For the first quarter of 2020, OHI reported a 13% increase in revenues to $253 million and a 28% increase in net income. Rent collection rates, which stand at 98%, led to most of the revenue increase. Additionally, it “sold five facilities for $39 million in cash generating $17 million in gains.” It also paid a 67 cents quarterly dividend to its investors. The company has an impressive dividend yield of 8.28 and a payout ratio of 1.63.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.