Investors understandably view Amazon as an e-commerce company, but they often ignore its disruptive effect on the real estate industry. As e-commerce has become more prominent, an activity that once took place at retail centers has moved to industrial properties, and that trend continues today.
However, the disruption also affected two other types of real estate. Airbnb (ABNB 1.91%) enabled tenants to better utilize residential and vacation properties, while Digital Realty Trust (DLR -1.19%) has led its own emerging real estate category.
Airbnb
Technology has played a critical role in the rental of homes and apartments on a short-term basis. Thanks to online lodging platforms, landlords can more easily find tenants for spaces that might otherwise lay idle.
The existence of this software reduces the need for hotels in many cases. In other instances, it can add supply to a market when events such as festivals or college football games bring temporary spikes in demand.
Although Expedia‘s Vrbo pioneered the concept, Airbnb has emerged as an industry leader. It utilizes technology such as artificial intelligence to help set competitive rates and profile its customers to find a suitable space. The company also has promoted creative concepts. One of them involves using its site to help apartment tenants sublet properties to fulfill apartment leases they no longer need.
Through such innovations, Airbnb generated $6.5 billion in revenue in the first nine months of 2022, an increase of 46% compared with the same period in 2021. Through keeping cost and expense growth in check, it also went from a $406 million loss to a $1.6 billion profit during this period.
Admittedly, the stock has fallen 55% since hitting a high soon after its December 2020 IPO. But its recent P/E ratio of 41 is just above record lows, and given the rising revenue and growth potential of its platform, Airbnb could rally this year.
Digital Realty
The emergence of cloud computing has transformed the tech industry, driving the creation of new companies and reviving the fortunes of established tech giants. Nonetheless, investors need to remember the cloud’s need for data centers and how these facilities have changed the real estate market.
Data centers are unique from a real estate perspective. They require physical security, reliable climate control, robust electrical systems, and a high level of connectivity that can ensure data access at any time.
Investors have grouped these buildings into a category called data center REITs. Allied Market Research estimates a compound annual growth rate for the industry of 11% through 2030, which should fuel a data center construction boom for years.
Although investors can choose from several data center REITs, one that stands out is Digital Realty. It operates more than 300 data centers on six continents, supporting over 4,300 customers, including clients like Verizon and IBM.
Moreover, a temporary growth slump and a stock market swoon could make Digital Realty attractive to some investors. Its $3.5 billion in revenue for the first three quarters of 2022 rose only 4% versus the same time frame in 2021. Adjusted funds from operations (AFFO), a measure of a REIT’s free cash flow, fell 2% to just under $1.4 billion amid rising expenses.
Fortunately, that allowed Digital Realty to cover just over $1 billion in dividend expenses for the period. That dividend pays shareholders $4.88 per share annually, a 4.6% cash return. Also, the payout has risen yearly since the REIT paid its first dividend in 2004, baking in an expectation of further annual increases.
Finally, with the aforementioned stock decline, Digital Realty trades at about 17 times its AFFO income. In the end, that valuation and the need for more data centers mean that investors can buy this growing income stream at a discount.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb, Amazon.com, and Digital Realty Trust. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
