Real estate stocks have been staging a comeback in the third quarter.
And that's great news for those invested in real estate investment trusts (REITs) – special tax-advantaged businesses that provide exposure to real estate. But even with the recent gains, many names in the sector look particularly cheap right now following a steep slide in the first half of 2022. As such, it appears a prime time for income investors to seek out value REITs.
Not only has this year's broader selloff reduced multiples on several real estate stocks, as measured by their price to FFO (funds from operations, a key REIT earnings metric), but, for the first time in years, many REITs are trading at a sizable discount to NAV (the net value of their real estate assets). Share price declines have also pushed REIT dividend yields to multi-year highs. During June, the average equity REIT dividend yield was 3.4%, or roughly twice the yield of the S&P 500.
REITs already tend to be some of the best dividend stocks because they are structured to return the majority of their earnings to shareholders. And it's these large payouts that have helped REITs to outperform other investments over long periods: REITs have returned 12.6% annually over the past 25 years, handily beating the 11.9% annual total return of the S&P 500.
And the best value REITs can be had even as the sector is still reporting solid fundamentals. According to research firm Hoya Capital, 85% of equity REITs reported better-than-expected March quarter results, and nearly 70% raised full-year FFO per-share guidance. The huge disconnect between REIT share prices and industry operating performance may create a rare opportunity for investors to boost portfolio yields and returns by loading up on cheap REIT stocks.
Here are 10 value REITs flying under the radar of income investors. The names featured here have experienced significant share price declines in 2022 to trade at deep discounts to their historic price multiples. Most are paying generous yields to boot.
Data is as of Aug. 10. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks are listed in reverse order of dividend yield.
Industrial Logistics Properties Trust
- Market value: $615.0 million
- Dividend yield: 0.4%
Industrial Logistics Properties Trust (ILPT (opens in new tab), $9.40) is an industrial REIT that recently acquired Monmouth Real Estate Investment in an all-cash transaction valued at $4.0 billion. On a pro forma basis, the combined portfolio presently consists of 383 industrial properties representing 55 million square feet of leasing space across 39 states. The portfolio has a greater than 99% occupancy rate and an eight-year average remaining lease term.
The benefits of the merger include increased tenant and geographic diversity, an upgrade to the portfolio from the addition of Class A, e-commerce focused tenants, increased operating scale, FFO accretion and an enhanced pipeline for acquisitions and property development.
Due to expenses associated with the merger, Industrial Logistics Properties March quarter normalized FFO per share (funds from operations, a key REIT earnings metric) came in approximately 11% lower year-over-year at 42 cents, but net operating income improved 31% and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was 30% higher. Analysts look for FFO per share to arrive at $1.50 his year and next year.
Despite the company's increased scale, ILPT shares are down more than 62% so far in 2022. Critics fault this REIT for being externally managed (which adds additional fees) and for being overly dependent on a few top tenants, which include FedEx (FDX (opens in new tab)), Amazon.com (AMZN (opens in new tab)) and RH (RH (opens in new tab)). Post-merger, the REIT will derive approximately 21% of its base rents from FedEx and 9% from Amazon.
ILPT shares have been heavily penalized for these perceived risks and trade at only 6 times forward FFO, which is a 61% discount to REIT peers. The company has a five-year track record of paying dividends, but no dividend hikes since 2018. And in July, Industrial Logistics Properties cut its quarterly dividend to boost liquidity until its long-term financing of Monmouth is complete. The company plans to return its dividend payment to a rate at, or close to, its historical level some time next year.
With that in mind – and given ILPT's recent decline – it could be time to pick up one of the best value REITs at a big discount.
Mid-America Apartment Communities
- Market value: $21.9 billion
- Dividend yield: 2.8%
Mid-America Apartment Communities (MAA (opens in new tab), $184.74) owns 282 apartment communities and 96,313 apartment units, primarily in the Sunbelt states. Its core geographic markets include Atlanta (13.1% of net operating income), Dallas (8.9%), Tampa (6.7%), Austin (6.5%) and Charlotte (6.4%).
A focus on the Sunbelt puts MAA in a great position to capitalize on existing demographic trends, with population growth forecast and new household formation in this market forecast at three times and two times the national average, respectively. Thanks to strong Sunbelt growth, these metro areas are experiencing housing shortages with new supply unlikely to catch up with demand in the near term, pushing rents higher.
MAA has an active development program with approximately $1 billion of new opportunities in the pipeline. It also has a redevelopment program covering 13,000 apartment units underway. Both of these are supported by the REIT's A1-rated balance sheet.
The company's March quarter results exceeded expectations; rent rose 12% and core FFO per share grew 20%. The company is guiding for 12% effective rent growth and 15% FFO per share gains this year.
Mid-America Apartment Communities has delivered 12 consecutive years of rising dividends, including a 15% hike in May. Payout from FFO is conservative at 55%.
MAA is down 19.5% so far in 2022 – making it a solid choice among value REITS. Additionally, Mid-America Apartment Communities appeared on Wells Fargo's list of the most recession-resistant real estate stocks during June.
Alexandria Real Estate
- Market value: $27.2 billion
- Dividend yield: 2.8%
Alexandria Real Estate (ARE (opens in new tab), $166.56) invests in life sciences, agricultural tech and technology office campuses in leading research markets such as Greater Boston, the San Francisco Bay area, New York, Seattle, Maryland and the Research Triangle in North Carolina.
Unlike traditional office properties, many of which are currently experiencing vacancy rates as high as 16%, Alexandria's life sciences office portfolio is 98.6% leased. An important distinction between Alexandria and other office REITs is that medical and technology research cannot be done remotely. ARE's top tenants are the world's leading pharma and biotech companies, including names like Bristol Myers Squibb (BMY (opens in new tab)), Moderna (MRNA (opens in new tab)), Eli Lilly (LLY (opens in new tab)), Sanofi (SNY (opens in new tab)) and Takeda (TAK (opens in new tab)). These tenants are both top-quality and recession-resistant.
Alexandria posted good March quarter results showing 2.5 million square feet of leasing activity, the second-highest quarter of leasing in the company's history. Rents rose 32% and FFO per share achieved 7.3% growth.
The REIT's robust development pipeline consists of 5.4 million square feet of space currently under construction and an additional 2.6 million square feet of space expected to commence construction over the next six quarters. This is projected to add over $665 million to annual rent revenues through 2025.
Consensus estimates look for Alexandria's FFO per share to rise 8% this year to $8.38 and 8% next year to $9.06, easily covering the REIT's $4.72 annualized dividend.
ARE has delivered 12 consecutive years of dividend growth, with hikes averaging 7% annually over five year. The latest increase was 3% in May. Another boost appears likely later this year as the REIT typically increases dividends biannually. Alexandria also boasts an investment-grade balance sheet that ranks among the top 10% of traded REITs.
Despite its strong development pipeline and growth prospects, ARE shares have declined more than 25% so far in 2022. What's more, the stock currently trades at a 19.3 times forward FFO – a discount when compared to its fellow REITs.
ARE stock is well-liked by Wall Street pros and enjoys Buy or Strong Buy ratings from 11 of the company's 12 covering analysts.
- Market value: $1.5 billion
- Dividend yield: 2.9%
iStar (STAR (opens in new tab), $17.08) helps businesses unlock the value of their real estate by acquiring properties and then leasing the land back to the customer. This REIT specializes in ground leases, which entail leasing land for a long time period to tenants who then construct buildings on the property.
STAR is the founder, investment manager and principal shareholder of Safehold (SAFE (opens in new tab)), which was the first public company to focus exclusively on ground leases. Over the past two decades, the company has closed over $40 billion of real estate transactions.
Throughout 2022, the company has been simplifying its portfolio, strengthening its balance sheet and expanding its ground lease business. In March, the company closed the $3.1-billion sale of its portfolio of net lease assets, consisting of 18.3 million square feet of office, entertainment and industrial properties across the U.S. iStar reported $585 million of net gains on this sale and received cash proceeds, after associated mortgage and other debt was paid, of $1.2 billion.
This large asset sale has shifted iStar's portfolio from a roughly 50-50 mix of non-core assets and ground leases to 80% ground leases, with additional sales of the remaining 20% of non-core assets anticipated in subsequent quarters.
The sales also extinguished more than $1.2 billion of consolidated debt from the company's balance sheet, which resulted in Moody's upgrading the REIT's credit rating to Ba 2 from Ba3. STAR also saw its preferred stock upgraded to a B1 rating.
Reflecting this gain on its asset sale, iStar's March quarter adjusted earnings per share (EPS) rose to $7.79 from 30 cents in the year-ago period. New ground lease originations from its Safehold business exceeded $677 million and provide a catalyst for EPS growth. STAR also benefits from 2% annual rent hikes and so-called consumer price index (CPI) lookbacks embedded in its leases. The latter allows for periodic rent adjustments when inflation stays above 2% for extended periods.
iStar initiated dividends in 2018, and has raised its payout by 22% since then. The dividend has a wide safety margin, with payout at less than 5% of EPS and 9% of FFO.
STAR is one of the best value REITs out there, with shares down 34% so far in 2022 due to inflation fears. The stock is currently trading at a lowly 2.0 times forward earnings.
- Market value: $1.3 billion
- Dividend yield: 3.4%
Centerspace (CSR (opens in new tab), $87.00) is an apartment REIT specializing in Midwestern markets. The company owns and/or operates 83 apartment complexes containing 14,838 apartment units. Its core geographic markets include Denver, Colorado; Omaha, Nebraska; Billings, Montana; St. Cloud, Minnesota; and Bismarck, North Dakota. During the March quarter, its apartment portfolio was 94.7% occupied.
While Midwestern markets don't get as much press as their Sunbelt neighbors, these regions also offer attractive fundamentals. Unemployment in the Midwest is below the national average and the region has a low supply of new housing in development, driving up both rents and occupancy rates.
Over 56% of CSR's net operating income is derived from markets that rank among America's top-50 MSAs (metropolitan statistical areas). Centerspace has pushed through rent increases in 2022 ranging from as high as 17.8% in Rapid City, 14.8% in Billings and 5.2% in Minneapolis, where approximately one-third of its apartment communities are located.
More opportunities to increase rents are coming from apartment renovations and adding new amenities to older complexes such as club houses, fitness centers, dog parks and other features. The REIT has renovated 1,271 apartments since 2019 and plans to fix up 739 properties this year. Average monthly rent increases after renovation have ranged around $200.
CSR achieved same-store lease increases of 7.9% during the March quarter and grew its portfolio by 397 new apartments acquired in the Minneapolis market. FFO per share improved 9.8% year-over-year and Centerspace increased its full-year funds from operations guidance to a range of $4.26 per share to $4.52 per share, suggesting 24% growth at the midpoint.
FFO per share has risen 19%, on average, annually over the last three years and dividends have averaged 11% annual growth.
Centerspace has made 24 consecutive years of dividend payments and resumed growing its dividend in 2021. Specifically, CSR hiked its payout by 3% last year and a 1.4% increase in 2022. Forward payout from FFO looks secure at 65%.
CSR shares are down 22% in 2022 to trade at 19 times forward FFO.
Hannon Armstrong Sustainable Infrastructure Capital
- Market value: $4.0 billion
- Dividend yield: 3.8%
Hannon Armstrong Sustainable Infrastructure Capital (HASI (opens in new tab), $45.71) invests in grid-connected and "behind-the-meter" green energy projects. For example, the REIT makes loans that help customers install solar panels on factory roofs or finance wind farm installation. The company also invests in sustainable infrastructure, such as desalination plants or electric grid expansion projects. At present sustainable infrastructure projects represent only 1% of the portfolio.
Yields on the REIT's green energy investments are attractive; Hannon Armstrong earns 7.7% yields on "behind-the-meter" projects and roughly 7% yields on both grid connection and sustainable infrastructure projects.
At present, HASI's $3.7 billion lending portfolio consists of 320 investments. Its average investment amount is $12 million and the average weighted life is 18 years.
This leading green energy REIT has generated 17% annual growth in assets and 10% yearly gains in distributable EPS since 2017. Going forward, the company aims to deliver 10%-13% annual gains in distributable earnings per share, which it expects can support 5%-8% yearly dividend growth.
Hannon Armstrong is off to a good start in 2022, with March quarter portfolio growth of 28% and distributable EPS up 21% year-over-year. And in its June quarter, HASI reported 30% portfolio growth and earnings per share that were up 5% over the year prior.
Despite this fundamental strength, HASI shares are down 14% in 2022. Analysts attribute this decline to a valuation that was too rich, as well as new legislation in California, an important green market, that will increase the cost of installing solar panels, potentially slowing new demand.
Now's the time for income investors to strike on one of the best value REITs out there. HASI has rebounded nearly 50% from its mid-July lows. Plus, the REIT signaled its confidence in its future earnings prospects via a 7% dividend hike in February, its largest increase since 2016. This was also its fourth consecutive year of dividend growth. Payout from adjusted EPS is approximately 75%.
Plymouth Industrial REIT
- Market value: $821.7 million
- Dividend yield: 4.3%
Plymouth Industrial REIT (PLYM (opens in new tab), $20.23) invests in logistics and manufacturing facilities across the midsection of the U.S. The REIT owns 206 properties totaling 33.6 million square feet of leasing space on key logistics and distribution corridors near Chicago, Indianapolis, Columbus, Memphis and other secondary cities. At present, its portfolio is 97% occupied.
PLYM's focus on Class B industrial properties in secondary markets is benefitting the REIT by allowing for bigger-than-average rent increases. During the March quarter, rates on new and renewed leases were 22.6% higher than expiring leases.
The company is also pursuing growth opportunities via acquisitions and development. In addition to the $1.6 billion of industrial properties it has acquired, Plymouth Industrial has 637,000 square feet of industrial projects in development that are scheduled for completion during 2022.
PLYM achieved an 18% increase in core FFO per share and 5.1% growth in same-store net operating income during the March quarter. The company is guiding for 2022 core FFO per share up at least 5% and exceeding $1.80. Guidance for same-store net operating income growth is between 3.5% and 4.5%.
The REIT recently rewarded investors with a 5% dividend hike, marking its second consecutive year of growth. Payout at a reasonable 49% of FFO suggests a very secure dividend.
Despite a solid March quarter performance and favorable positioning in a rising logistics real estate market, PLYM is one of the best value REITs around. Shares trade at less than 11 times forward FFO, which is a 30% discount to other real estate stocks. Plus, shares are down more than 38% so far in 2022.
A possible explanation for the REIT's poor valuation is an overhang caused by large numbers of preferred shares that are converting to common stock. However, that issue is in the process of being resolved. The company converted 2.2 million shares of outstanding preferred stock to common stock in April. This dilution has already been factored into management's 2022 FFO per share guidance.
PLYM enjoys Buy or Strong Buy ratings from six of its eight Wall Street analysts, with the remaining two calling the stock a Hold.
- Market value: $6.2 billion
- Dividend yield: 4.4%
STAG Industrial (STAG (opens in new tab), $33.58) is an industrial REIT that primarily invests in single-tenant properties across the U.S. The company owns 551 properties representing 110.1 million square feet of space in 40 states. At the end of June, its portfolio was 98.1% occupied and showed a weighted average remaining lease term of 5.3 years.
Many of STAG's facilities are in secondary markets such as Chicago, Philadelphia, Milwaukee, Detroit and Columbus. Approximately 40% of the REIT's rents are e-commerce related; top tenants include Amazon.com, Eastern Metal Supply, American Tire Distributor and FedEx.
During the March quarter, new and renewed leases at higher rents supported 8.1% gains in FFO per share. STAG also spent $166.4 million to acquire eight new properties and nearly 1.8 million square feet of leasing space. Underscoring this fundamental strength, the REIT raised full-year FFO guidance, now expecting FFO per share of $2.18 for all of 2022, up approximately 11% from last year. Guidance assumes $1.0 billion of acquisitions this year.
STAG shares are down 30% in 2022 – making it a strong choice among value REITs. One possible explanation for this particular REIT's share-price weakness may be exposure to Amazon. The e-commerce giant recently indicated that it is cutting back on its footprint expansion due to rising costs and slowed consumer spending. Still, despite having Amazon as its top tenant, this particular retailer only accounts for 3.2% of STAG's annual rents, so this risk is certainly manageable.
The REIT is a solid dividend growth stock, having raised its payout for 10 consecutive years. Payout from FFO is in a comfortable range at below 70% and STAG stands out as one of a handful of REITs that pays monthly dividends.
Bullish investors like STAG Industrial's solid balance sheet and well-covered dividend. Wall Street pross are upbeat toward the value REIT too, as evidenced by the Buy and Strong Buy ratings it has earned from eight of 12 covering analysts.
Hudson Pacific Properties
- Market value: $2.1 billion
- Dividend yield: 7.0%
Hudson Pacific Properties (HPP (opens in new tab), $14.86) specializes in office and studio properties leased to leading technology and media companies. Its portfolio consists of 66 properties encompassing 21.3 million square feet of leasing space located across the U.S. West Coast, Canada and the U.K. Roughly half of the portfolio is leased to technology, media and entertainment companies with top tenants including Google, Netflix (NFLX (opens in new tab)) and Amazon.
Portfolio occupancy exceeded 90% for the REIT's office properties and 84% for its studio properties during the June quarter. The company also signed new and renewal leases covering 714,000 square feet of space at 5.5% higher rents.
The REIT's June quarter revenues improved 16.6% and beat analyst estimates and adjusted FFO per share came in 3% higher. The REIT is calling for 2022 FFO per share that is up roughly 5% at the high end of guidance.
Hudson Pacific has an investment-grade credit rating and a 12-year track record of continuous dividend payments. Its last dividend hike was in 2016, when it raised its payout by 25%. Dividend payout is modest for a REIT at less than 50% of FFO.
While dividend hikes are infrequent, the company often rewards investors via stock buybacks. At present, Hudson Pacific has a $200 million accelerated share repurchase program underway, with approximately 6.6 million shares already repurchased and final settlement anticipated during the September quarter.
HPP shares dropped in June after BofA Securities analyst James Feldman downgraded the stock to Neutral (Hold) due to what he saw as a leasing slow down by the company's San Francisco office tenants. However, Feldman also recognized HPP as one of the most skilled developers in the West Coast office space sector.
The value REIT is down 40% so far in 2022 to trade at 7 times forward FFO, a more than 50% discount to the industry peer multiple.
Global Net Lease
- Market value: $1.6 billion
- Dividend yield: 11.0%
Global Net Lease (GNL (opens in new tab), $14.84) is a diversified REIT that invests in office and industrial properties located across the U.S., Canada and Western Europe. The company owns 309 properties representing 39.3 million square feet of leasing space.
Its portfolio mix is 42% office, 55% industrial and 3% retail, with approximately 200 of these properties spread across the U.S. The portfolio is net leased (meaning the tenant is held responsible for maintenance, taxes and other property costs) to nearly 140 mostly investment-grade tenants, including familiar names like FedEx, Whirlpool (WHR (opens in new tab)) and Penske Automotive (PAG (opens in new tab)).
GNL has delivered annual revenue and FFO growth of 10% and 7%, respectively over five years. However, FFO per share has declined due to dilution caused by equity offerings to raise capital for property purchases.
Still, Global Net Lease's FFO per share grew 5% during the March quarter as the REIT benefitted from embedded rent increases in 94% of its leases, with 28% of those hikes tied to CPI. Portfolio occupancy was 98.7% during the quarter and the average weighted remaining lease term was 8.4 years.
This REIT's debt level is relatively high at 7.7 times adjusted EBITDA, but interest coverage is strong at 3.6 times. Plus, debt is primarily fixed rate with a low weighted 3.4% average interest rate.
GNL stock has struggled over the long term – down 35% over five years – but it has outperformed its peers in 2022, with shares off 3% for the year-to-date.
What really makes GNL one of the best value stocks is its high dividend yield. Global Net Lease has been paying dividends continuously since 2015, and switched from monthly to quarterly payments three years ago. The company's dividend has held steady at the current rate since 2020. And with payout at a somewhat high 90% of FFO, it's likely there are no dividend hikes on the radar in the immediate future.
Dividend risk appears to be already priced into the stock. GNL shares currently trade at 9.1 times forward FFO, which is a 42% discount to REIT industry peers. In addition, Global Net Leases's rich 11.0% dividend yield is nearly three times that of the average REIT.
Lisa currently serves as an equity research analyst for Singular Research covering small-cap healthcare, medical device and broadcast media stocks.
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