The Most Undervalued Real Estate Investment Trusts

Adam Johnson

The most undervalued real estate investment trusts (REITs) offer intriguing opportunities.

The question of which REITs are most undervalued is never ending, since it requires constant evaluation as share prices change. Currently, REITs have rallied over the past eight weeks, but a prominent REIT index remains down over 13% year-to-date (YTD).

There are a multitude of factors that go into the fluctuating valuation of REITs, including rising interest rates and recession fears. However, the decline in the value of REITs may leave investors wondering whether any bargains are hiding in the sector.

Continue reading to discover a few.

The Most Undervalued REITs: What is a REIT? 

A REIT owns, operates or finances income-producing real estate. There are a wide range of property types that REITs invest in, including apartment buildings, warehouses, offices, retail centers, medical facilities, data centers, hotels, cell towers, timber and farmland.

Generally, REITs follow a straightforward business model: the company buys or develops properties and then leases them to collect rent as its primary source of income. However, some REITs do not own property, choosing the alternative route of financing real estate transactions. The REITs generate income from the interest earned on the financing.

Investors can buy shares in a REIT company, the same way shares can be purchased in any other public company. Investors can buy REIT shares on major public stock exchanges such as the NYSE or NASDAQ.

There are more than 225 REITs in the United States that trade on major stock exchanges, as well as are registered with the Securities and Exchange Commission (SEC). These REITs are primarily traded on the NYSE and have a combined equity market capitalization of more than $1 trillion.

Furthermore, REITs can appreciate in value just like other equity investments, but are required to pay out at least 90% of the income to investors in the form of dividends, making them an attractive play for income-focused investors.

The Most Undervalued REITs: Year-to-Date (YTD) Performance

Real estate investment trusts had their best year in history during 2021. The bullish combination of a booming economy and rock-bottom interest rates stimulated extreme growth. Not only was the rebound of the U.S. economy beneficial for real estate, but investors flocked to the high-yielding dividends that REITs offer.

Real estate became the second-best performing sector in the U.S. stock market after energy in 2021. For instance, the Vanguard Real Estate ETF (NYSEARCA:VNQ) had the best year in its 18-year history with a 40.5% return.

But as interest rates hiked and fears of recession spread, returns dropped drastically in 2022. At its worst levels, the FTSE Nareit All Equity REITs Index was down 18.8% this year. Meanwhile, VNQ is down nearly 14% in 2022, its largest loss at this point in the year since the ETFs launch.

However, the good news for investors is that thanks to steep share price declines, many of these high-yielding stocks are now trading at big discounts compared with where many equity analysts peg their fair value.

The Most Undervalued REITs: Which REITs Are Undervalued Now?

Like most of the market, REITs are materially off from their latest high right now. Some have fallen more than others. A list of a few real estate investment trust stocks currently trading at the biggest discounts is shown below.

The Most Undervalued REITs: Ventas, Inc. (NYSE: VTR)

  • Industry: Healthcare Facilities REIT
  • 2022 Performance YTD: -0.73%
  • Dividend Yield: 3.49%

Vintas combines the benefit of owning REITs with exposure to another stock market sector, health care. VTR owns and operates a portfolio of 1,200 senior housing and health care properties. The REIT either leases to tenants or operates via independent third-party managers.

Furthermore, an aging U.S. population, along with growing senior health care needs, is likely to drive further demand for health care and thus VTR’s portfolio of properties.

Although the COVID-19 pandemic severely affected senior and assisted-living housing. VTR’s occupancy had recovered to an average of 83% and with its balance sheet stabilizing significantly by the end of the first quarter of 2022.

Lastly, Ventas’ acquisition of New Senior Investment Group to expand its exposure to the sector ahead of what should be a decade of strong growth is a good indicator of upcoming growth and profit.

The Most Undervalued REITs: Iron Mountain (NYSE: IRM)

  • Industry: Storage and Information Management
  • 2022 Performance YTD: 4.42%
  • Dividend Yield: 4.62%

Iron Mountain is a global leader in innovative storage, asset lifecycle management and information services. It stores and protects billions of valued assets, including critical business information, highly sensitive data, and cultural and historical artifacts.

Part of the strength of IRM’s business model is that it has long-term leases with its customers, which currently average 11.9 years while its data center leases average 4.5 years. Additionally, nearly 95% of Fortune 1000 companies are IRM’s clients that support the REIT’s long-term stability.

The company is also adopting to modern times by investing in data centers to store digital data. The combination of document storage and fast-growing new data center segment make IRM an attractive investment.

Moreover, Q1 of 2022 saw overall revenue grow 15%. Storage remains IRM’s biggest revenue generator, but service has seen substantial growth with a 33% increase in revenue. In addition, IRM continues to revamp data centers capacity by increasing megawatt and implementing 124 leases.

Furthermore, Iron Mountain is currently maintaining a 4.3%, 5-year dividend growth average. The Adjusted Funds From Operations (AFFO)/Dividend Payout ratio of 67.97% suggests continual improvement. In fact, IRM is approaching management’s target for a low to mid-60’s% payout ratio. This means that increasing the dividends can be foreseen in the near future.

Owning a piece of a business that will be difficult to replace can be quite rewarding. Data and paper storage and management will not be going away anytime soon. Therefore, IRM is considered a long-term buy, based on strong earnings and strong possibility of future dividend increases.

The Most Undervalued REITs: Crown Castle Inc. (NYSE: CCI)

  • Industry: Telecommunications
  • 2022 Performance YTD: -11.47%
  • Dividend Yield: 3.20%

Crown Castle is a large player in telecommunications in the REIT space. It is commonly compared to American Tower Corporation (NYSE: AMT) except CCI is more focused on small site locations rather than the traditional large tower facilities.

In recent years, CCI has posted double-digit percentage compound growth rates. However, currently the stock is down nearly 11.5% on a year-to-date basis. This comes even as the company has continued to grow both its top-line revenues and its dividend payments.

Therefore, it is fair to second guess if Crown Castle’s best days are already behind it. But the company has plenty of growth left. For example, emerging markets such as Latin America and Africa retain significant opportunities for more mobile network usage.

Additionally, the rollout of 5G, connected vehicle technology, and other such data uses will push more mobile demand even as smartphones become a fully mature market.

The Most Undervalued REITs: The Bottom Line

As REITs start to lose value due to hikes in interest rates and recession fears, the well-performing sector of real estate with high dividend yields becomes more affordable for investors.

The three REIT stocks listed above are only a few real estate investment options that investors can consider during current market fluctuations. However, different REIT investments come along with varying degrees of risk. Individual investors should decide their risk tolerance, do research and invest accordingly.

Adam Johnson is an editorial intern who writes for www.stockinvestor.com and www.dividendinvestor.com.

share on:

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
share on:

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

  • Forecasts & Strategies
  • Home Run Trader
  • Fast Money Alert
  • Five Star Trader
  • TNT Trader
LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

  • Cash Machine
  • Premium Income PRO (exclusively for subscribers of Cash Machine)
  • Quick Income Trader
  • Breakout Options Alert
  • Hi-Tech Trader
LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

  • Successful Investing
  • High Velocity Options
  • Intelligence Report
  • Bullseye Stock Trader
  • Eagle Eye Opener
LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

  • Retirement Watch
  • Retirement Watch Spotlight Series
  • Lifetime Retirement Protection Program
LEARN MORE HERE

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

  • Investment House Daily
  • Stock of the Week
  • Technical Traders Alert
  • Rapid Profits Stock Trader
LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

  • Dividend Investor
LEARN MORE HERE