Will These 2021 REIT Winners Bounce Back From Their 2022 Slumps?

The stock market took another hit on Friday, as investors reacted to a combination of news that created even more uncertainty about the future. A strong employment report pointed to a robust U.S. economy that, in turn, would tend to signal higher interest rates ahead.

However, many conservative investors turned to the bond market as a safer place to put money than stocks right now, so yields actually fell despite the potential inflationary pressures from greater wage growth than expected. The net result was a drop in the stock market. As of noon ET, the Dow Jones Industrial Average (DJINDICES:^DJI) was down 458 points to 33,337. The S&P 500 (SNPINDEX:^GSPC) fell 68 points to 4,296, and the Nasdaq Composite (NASDAQINDEX:^IXIC) dropped 283 points to 13,254.

Many investors have tried to broaden and diversify their portfolios beyond typical stocks, and one area that’s gotten more attention is the real estate investment trust (REIT) universe. REITs like marijuana-industry specialist Innovative Industrial Properties (NYSE:IIPR) and data center property-holder Digital Realty Trust (NYSE:DLR) had strong performances in 2021, producing total returns of 47% and 31%, respectively, last year. However, the two have taken huge hits so far in 2022.

Below, let’s take a closer look at these income investments to see if they have the power to rebound from their recent declines.

Person wearing mask and gloves looking at a cannabis plant.

Image source: Getty Images.

Innovative Industrial is still growing strong

Shares of Innovative Industrial have fallen 32% so far in 2022, giving back almost all of the REIT stock’s gains from 2021. Yet from a fundamental standpoint, the company still has a lot going for it.

Innovative Industrial owns properties that it then leases to marijuana-cultivation businesses for growing or general administrative operations. The REIT spent $714 million on 37 new acquisitions, as well as upgrades to existing portfolio holdings. By year-end, Innovative Industrial owned more than 100 properties in 19 states.

Innovative Industrial’s 2021 financial results showed how successful its business model has been. Revenue, net income, and adjusted funds from operations were all up between 75% and 80% for the year. The REIT paid dividends of $5.72 per share to investors, up 28% from its total payout the previous year and continuing a streak of dividend growth that dates back to the REIT’s appearance as a publicly traded stock.

Investors have cooled on marijuana stocks, but cannabis remains big business, and Innovative Industrial hasn’t yet seen signs of an impending rise in default rates that would jeopardize its income. Competition from other funding providers could slow growth, but Innovative Industrial’s first-mover edge gives it a strong reputation and the ability to raise new capital to further fund expansion. Combine that with plenty of dividend growth, and the REIT’s shares look especially attractive after their decline.

Digital Realty looks to recharge

Digital Realty Trust has seen its stock fall 21% so far this year, giving it only a tiny gain since the end of 2020. Even so, the trend toward digital transformation hasn’t shown any clear signs of slowing, and that should bode well for the REIT, even as competition rises.

Digital Realty has been a stealth growth stock over the years. Even with the REIT envelope and a solid yield, the business has grown to establish a truly global footprint. Digital Realty’s holdings include more than 280 data center facilities in almost 50 key metropolitan areas across 25 countries. This scope allows Digital Realty to attract world-class clients to lease space, producing considerable income.

Financial results have been impressive. Revenue rose more than 13% in 2021 to $4.43 billion, producing core funds from operations of $6.53 per share, up from $6.22 per share the previous year. The REIT is looking for incremental growth in 2022, even as industry conditions tighten up a bit, including calls for core funds from operations to rise to between $6.80 and $6.90 per share.

Technology stocks have taken big hits, so it’s tempting to lump in Digital Realty with the broader industry. Yet even if some smaller tech companies don’t survive tough times, that shouldn’t affect the overall demand for data center services. That should keep Digital Realty on an upward track over the long haul.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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