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Two "Prudent" REITs for Value Investors

07/13/2018 5:00 am EST

Focus: REITS

John Buckingham

Principal, Portfolio Manager, and Editor, The Prudent Speculator

Periodic bouts of red ink, or larger declines like 10% corrections and even 20% bear markets, are a normal part of the investment process, explains value expert and money manager, John Buckingham, editor of The Prudent Speculator.

So we hardly think the current environment is any more troubling than what we have endured throughout our 41 years of publishing our newsletter.

We do not mean to sound cavalier, but there is almost always something to worry about, yet equities have proved extraordinarily rewarding for those who remember that the secret to success in stocks is not to get scared out of them.

Digital Realty Trust (DLR) is an owner and manager of technology-related real estate. The data centers are located throughout the U.S. and England, along with Europe, Asia and Australia, and host critical infrastructure for clients of all sizes.

With its 205 data centers in 32 markets, DLR offers customers a robust global ecosystem that utilizes more than 1,000 telecom providers, ISPs, content providers and enterprises to provide carrier-neutral interconnection facilities.

The company provides its broad customer base (more than 2,300 clients; IBM (IBM) is the largest at 6.5% of aggregate annualized rent) with multi-cloud connectivity and flexible bandwidth.

We believe that the build-out of cloud infrastructure around the world creates growing demand for DLR’s offerings, as major technology companies like Microsoft (MSFT) work to deploy their cloud-based applications and services.

With DLR uniquely positioned to benefit from this growth, analysts expect 2018 funds from operations (FFO) of $6.52 per share (vs. $6.14 for 2017). The stock also has a 3.6% dividend yield.

Physicians Realty Trust (DOC) is a small-cap healthcare REIT that acquires, owns and manages health care properties that are leased to physicians, hospitals and healthcare delivery systems, and other health care providers. Its properties are typically on a campus with a hospital or strategically located and affiliated with a hospital or physician organization.

Shares are off more than 20% from their recent highs, with rising interest rates and capital raises (via stock issuance) taking a toll. That said, we are positive on the name and like that physician group and health system consolidations in outpatient facilities have been keeping operating fundamentals for DOC strong.

We favor the expertise and experience of the management team, the favorable demographic trends (e.g. 20% of the U.S. population is projected to be older than 64 before 2030), as well as the continued focus on leveraging its physician and hospital relationships nationwide to invest in off-market assets that maximize returns to shareholders.

Of its 13.6 million square feet of leasable space, almost 97% is filled with a weighted average lease term of 8.2 years. The dividend yield is north of 5.8%.

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