OPI - Buried Treasures: 10 Dramatically Undervalued REITs Yielding Over 5%

2023-11-24 09:00:00 ET

Summary

• REITs have experienced a significant drop in value due to rising interest rates and inflation.
• However, with inflation under control and interest rates expected to stabilize or decrease, REITs are poised for a surge.
• A list of 28 undervalued REITs with a yield of 5% or better is provided, along with 10 additional REITs to consider.
• This list is narrowed down to 10 prime candidates and 6 strong alternates.

The past two years have not been kind to REITs. From a high of $116.71 on New Year's Eve, 2021, the VNQ tumbled all the way to $70.61 on October 30 of this year, a stomach-churning drop of 39.5% in less than two years.

Most of this has been caused by rising interest rates, induced by galloping inflation in late 2021 and early 2022. Thanks to the Fed, cautious investors can now get about 5% with little or no risk (and little or no upside). But what if you could get a safe yield of more than 5%, on an investment with better than 20% upside?

After the brutal sell-off of the last two years, REITs are poised for a surge . The landscape is littered with quality REITs whose yields are at or near their all-time highs. Inflation appears to be under control , and nearly down to the Fed target of 2%. It is likely that interest rates will hold steady or drop in the foreseeable future.

For the more risk-averse investors, value investors, and investors who depend on dividend income (such as retirees), this article identifies all the equity REITs that are at least 20% undervalued and yielding 5% or better. I will then narrow the list down according to dividend safety, balance sheet quality, and projected growth, to arrive at a group that should not only pay well but hold or handsomely increase their share value over the next year or two.

The List

Here is a list of all 28 REITs that fit the above criteria. In this table and those that follow, "Discount" is the discount from the target buy price.

Note: In the table above, "Discount" is the discount from the target buy price.

No Sucker Yields, Thanks

Often, when a company is sporting a high dividend, it is precisely because the business is failing. The stock price is falling, and the dividend has not yet been cut, so the Yield looks really juicy. The investor who takes the bait of that high yield often soon regrets it, as the company slashes its dividend and COWhand investors flee, leaving the bait-taker with the worst of both worlds: reduced yield and dramatic share price loss.

Within the scope of this article, it's not feasible to examine every company, testing for sucker yields, but we can do some simple screens. First, we can screen for Dividend Safety, eliminating any company with a grade of D or worse, as assigned by Seeking Alpha Premium.

That eliminates:

• AIRC ("D-")
• CLPR ("F")
• HR ("D-")
• CCI ("D")
• DOC ("D")
• GNL ("F")
• OLP -- ("D")

and puts the following four companies on the bubble, with a Dividend Safety grade of D+ :

• NXRT
• NSA
• BDN
• AHH

No Sinking Ships, please

To me, there is nothing riskier than a company whose revenues are falling. These are the kinds that end up cutting their dividends.

We want stable, healthy companies, so next, we can eliminate any company whose FFO/share is expected to fall next year, according to consensus estimates, based on forecasts by the companies themselves, and the Wall Street analysts who follow them.

Source: Hoya Capital Income Builder

This screen eliminates the following four companies:

• IRT
• NXRT
• BRX
• AHH

Note that while our original list included 12 Office REITs, all of them have been eliminated except BXP and CUZ, which passed by the skin of their teeth.

We are left with 16 buried treasures. Of these, 10 carry a safe yield of over 5%, with stable revenues and sturdy balance sheets and are at least 20% undervalued. Eight of these are shown in green, and two (on the bubble) are shown in grey.

The other 6 also carry safe yields, stable revenues, and sturdy balance sheets, but come just a little short of either the 5% yield or 20% upside threshold. Those are shown in blue. They are as follows, in order by implied return (Discount + Yield).

Source: Hoya Capital Income Builder and Seeking Alpha Premium

Note: just because a company appears on this list, that does not mean I recommend buying shares. There are some on this list that I would never buy under any circumstances. You will need to do your own due diligence, as always, but hopefully, this list will save you a lot of time, by narrowing the field.

And remember, the opinion that matters most is yours. Because it's your money.

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