INVH - Run Don't Walk To These 5 Sweet REIT Bargains
2023-10-04 07:10:00 ET
Summary
- REITs have experienced a significant decline in the past month, making it the 3rd worst bear market in the last 25 years.
- The crash in REITs is attributed to long-term rates roaring higher at the fastest rate in at least 20 years.
- The best blue-chip REITs will profit from the end of "free money forever." When the market realizes this, deep value REITs will likely rocket higher.
- These are the 5 most undervalued quality REITs you can buy today, 34% undervalued, and yielding almost 5%. They offer the potential for almost 400% returns in the next decade and 5X the return potential of the S&P over the next 2 years.
- I can say with very high confidence that anyone buying these 5 sweet REIT bargains will feel like a genius in 5+ years.
Real estate investment trusts, or REITs, have gotten crushed in the last month, down 7%.
How bad is the REIT bear market?
It's the 3rd worst of the last 25 years. The only time better to buy REITs was the bottom of the Great Recession or the bottom of the Pandemic; both times, the economy was collapsing.
Why are REITs crashing?
Because in Q3, long-term rates soared the most in the last quarter century at least.
It's not the rates themselves that have crushed REITs; it's the relentless furiosity with which yields just keep soaring.
Seeking Alpha
Throw in some worst-case scenario forecasts from the likes of Jamie Dimon or Bill Ackman (5.5% 30-year yields), and you can understand why REIT investors, utility investors, or pretty much anyone owning anything high-yield is running for the exits.
During the worst bond bear market in history, it's crazy to buy utilities, yieldCos, or REITs, right?
In this article, I explain why the market is dead wrong to freak out over rising rates.
Yes, some REITs are going to suffer from higher costs of capital. But none of the ones you want to own for the long term.
The bottom line is this.
The market thinks "rates up REITs down" because they are a "bond alternative."
That was the story for 15 years in the "free money forever" TINA era.
That era is over; dead, buried, and there's a grocery store on top of the gravesite.
That means the good old days are back when REITs will trade on fundamentals, or they soon will be.
I can't tell you exactly when, but I can tell you that when the market rediscovers this simple fact, the best REITs will sky-rocket off today's absurdly great valuations.
- Investment spread = cap rate - borrowing cost/cost of capital.
This is the only fundamental thing that directly drives profitability for REITs.
When rates rise, property prices fall, and cap rates go up. If rates go up 1% and cap rates go up 1%, then the ability of the REIT to grow hasn't changed any.
But I bet you that the price is temporarily lower! But it won't be forever, and when the REIT returns to fair value, that's free money you just made.
Better yet, yield + growth = total return. So, if you buy a REIT at a bargain today and hold it forever, the benefits of buying at a discount last forever.
Free money forever!" - the new REIT era (buy REITs today and earn free profits others left on the table for the rest of your life).
My Favorite 5 High-Yield REIT Blue-Chip Bargains
From 504 stocks in the Dividend Kings Master list to four 5+% yielding non-speculative investment grade, non-speculative REITs.
All in one minute, thanks to the DK Zen Research Terminal. This is how I find all my investment ideas.
| Step |
| Screening Criteria |
| Companies Remaining |
| % Of Master List |
| 1 |
| "lists" and "REITs" |
| 53 |
| 10.60% |
| 2 |
| Non-Speculative (No Turnaround Stocks, investment grade) |
| 37 |
| 7.40% |
| 3 |
| BHS Rating "reasonable buy, good buy, strong buy, very strong buy, ultra value buy" |
| 34 |
| 6.80% |
| 4 |
| 81+% dividend safety score (2% or less risk of cut) |
| 27 |
| 5.40% |
| 5 |
| Sort By Discount To Fair Value |
| 0.00% |
| 6 |
| Top 5 Dividend Aristocrats |
| 5 |
| 1.00% |
| Total Time |
| 1 minute |
We have top-quality non-speculative REITS with very safe dividends and the best historical discounts to fair value.
These are the most coiled springs among REITs you want to own.
Run, Don't Walk To These 5 REIT Bargains
I sorted these by discount to fair value and linked them to further research reading.
- Alexandria Real Estate ( ARE ) - bio lab REIT, not office
- American Tower ( AMT ) - highest yield in history
- Simon Property Group ( SPG ) is the only mall REIT worth owning
- Invitation Homes ( INVH ) - median mortgage cost is up 4X in the last decade
- Extra Space Storage ( EXR ) - Americans own way too much crap and never throw anything away.
Fundamental Summary
- Yield: 4.5%
- dividend safety: 91% very safe = 1.45% dividend cut risk
- overall quality: 91% Ultra SWAN
- growth consensus: 7.5% vs. 6% for the REIT sector
- total return potential: 12.0% CAGR vs 10.2% S&P 500 and 11% aristocrats
- discount to fair value: 34%
- DK rating: potential very strong buy (1% below Ultra Value, Buffett-style "fat pitch") buy
- 10-year valuation boost: 4.2% per year
- 10-year consensus total return potential: 4.5% yield + 7.5% growth + 4.2% valuation boost = 16.2% per year = 348% vs 10.0% S&P = 160%.
More than twice the return potential of the S&P and 3X the yield and a much safer yield at that.
Historical Returns Since 2004
12% long-term return consensus vs. 12% historical return over the last two decades, market-beating returns, and 2X the returns of VNQ.
What about returns from ferocious bear markets like this?
The Last Time These 5 REITS Were This Undervalued
| Time Frame (Years) |
| Annual Returns |
| Total Returns |
| 1 |
| 96% |
| 96% |
| 3 |
| 49% |
| 229% |
| 5 |
| 35% |
| 340% |
| 7 |
| 31% |
| 573% |
| 10 |
| 26% |
| 887% |
| 15 |
| 16% |
| 878% |
(Source: Portfolio Visualizer Premium.)
The last time these REITs were this cheap, they went up 10X in 10 years.
Consensus Total Return Potential Through 2025
- if and only if each company grows as analysts expect
- and returns to historical market-determined fair value
- this is what you will make.
Alexandria Real Estate
American Tower
Simon Property Group
Invitation Homes
Extra Space Storage
S&P 500
- S&P 15% = 6% annual return potential
- 5 best REIT bargains: 79% = 29% annual.
5X the market's short-term return potential and 3X the much safer yield.
Bottom Line: Run, Don't Walk To These 5 REIT Bargains
Am I telling you the ratepocalypse is over? That yields will turn on a dime, crash, and REITs will soar like a rocket?
Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested."- Peter Lynch.
I can't tell you when rates will stop rising quickly. I can say that ARE, AMT, SPG, INVH, and EXR are five of the best deep-value REITs you can buy today.
Their dividends are relatively safe, their balance sheets are strong, and their businesses should easily survive or even profit from the decline in property prices created by higher rates.
That's why I can strongly recommend these 5 REIT bargains and say with high confidence that if you buy them today, in 5+ years, you'll feel like a stock market genius if you do.
For further details see:
Run, Don't Walk To These 5 Sweet REIT Bargains