7 Dividend-Growing REITs That Cost Next To Nothing
Thanks to recent stumbles, real estate investment trusts are cheap
Real estate investment trusts (REITs) have been one of the go-to investments over the past few years as investors have looked toward securities with high yields. And thanks to their tax structures, most REITs have yields in the 4% to 7% range. However, with interest rates rising, REITs have been left by the wayside. For the first time in several quarters, REITs have underperformed stocks.
And in that underperformance, many REITs have become big-time bargains. Price-funds-from-operations (P/FFO) at many REITs have dipped to lows not seen in years. FFO is essentially a measure of cash flows, and to many investors it’s the single-most important thing you can look at when examining REITs.
Forget about EPS or P/Es — it’s all about the FFO if you want to make sure you’re getting a safe dividend with the potential to grow.
With cash flows rising and prices dropping, investors now have the opportunity to buy REITs and the potential for higher yields at discounts. But which ones to buy? Here are seven REITs that are major bargains.
REITs That Are Major Bargains #1: Brixmor Property Group Inc (BRX)
Forward P/FFO: 9.87
With online sales taking more of brick and mortar sales, retail REITs have suffered greatly in recent years. However, Brixmor Property Group Inc (NYSE:BRX) may be worth buying.
BRX is one of the largest owners of strip malls and community centers in the nation. And that’s actually a good place to be. Grocery store anchored real estate is still doing surprisingly well as the focus features more local needs than just shopping. Not to mention lower apparel focus. Restaurant, entertainment and other non-ecommencable stores often dot BRX’s plazas. Even better is those plazas are often located in some of the best metro-areas in the country- leading to higher sales per square foot.
That’s been evident by BRX’s continued string of earnings beats. During the last quarter, Brixmor managed to report FFO of 53 cents per share- two cents more than analyst’s expected. Revenues at the REIT also managed to beat expectations. With the continued FFO beats, analysts have now begun to upgrade the stocks chances in the year ahead. That and the recent retail REIT sell-off has pushed down BRX shares to a low forward P/FFO metric of just 9.87.
For that cheap price, investors are buying a growing 5.55% and a pretty Amazon-proof portfolio of buildings. Whole Foods just happens to be one of BRX’s largest tenants.
REITs That Are Major Bargains #2: Medical Properties Trust (MPW)
Forward P/FFO: 9.74
The issues surrounding healthcare have also wreaked havoc on REIs operating in the medical real estate sector. Medical Properties Trust, Inc. (NYSE:MPW) could be one of the best to scoop up from wreckage at a bargain prices.
Medical Properties Trust focuses its attention on strictly owning healthcare facilities. That includes everything from standard regional/community hospitals to more specialized acute care, ambulatory surgery and children’s hospitals. MPW also is considered a hybrid REIT as it owns physical properties, as well as provides financing/investing in loans tied to new hospital construction.
Medical Properties has been smart with expansion efforts. That’s included investing overseas in areas with large aging populations- like the U.K. and Germany. MPW has also been active in acquiring here at home. Its latest deal for 11 hospitals would instantly be accretive to cash flows.
Not that MPW needs the help. The hospital owner continues to see double-digit FFO growth from its portfolio. Medical Properties now estimates that its FFO with grow to 1.31 this year and $1.46 in 2018.
And investors can have MPW stock for a low P/FFO of just 9.74 and a 7.7% yield.
REITs That Are Major Bargains #3: Piedmont Office Realty Trust, Inc. (PDM)
Forward P/FFO: 11.98
When it comes to operating office buildings, the key is making sure you’re in the top areas of stability and growth. Owning a building in a suburb of a less than desirable corporate locale is pretty meaningless. For office REIT Piedmont Office Realty Trust, Inc. (NYSE:PDM), that means owning Class A buildings in nine of the largest U.S. office markets, including Boston, Atlanta, L.A. New York and Washington, D.C.
More importantly, more than 70% of its tenants in those areas are either governmental tenants or large, nationally-recognized companies. There are relatively no “fly-by-night” renters for PDM’s buildings.
For PDM that leads to high retention and renewal rates for its buildings. For investors, that creates stable and ample cash flows. This year, analysts expect PDM to grow its FFO by more than 5%. That leaves plenty of room to raise its dividend and has helped with recent analyst upgrades.
Meanwhile, at just 11.98 P/FFO, PDM is one of the cheapest office REITs you can own. Much of that cheapness comes from the fact that Piedmont isn’t as large as many rivals. But who cares, if the properties are throwing off create cash flows and are highly coveted by renters.
PDM yields 4.21%.
REITs That Are Major Bargains #4: Outfront Media (OUT)
Forward P/FFO: 11.21
According to the IRS, renting a billboard is just the same as renting an apartment. For Outfront Media Inc (NYSE:OUT) that’s amazing news.
OUT was the first billboard company to receive a private letter ruling for REIT status. OUT owns hundreds of billboards, bus station signs, bus/railroad wrappers, etc. that it rents out to advertisers. The key to its business model is that Outfront owns the leases to use and the physical billboard, but not the land they sit on. That frees it from property taxes and provides for extra cash flows.
OUT is also benefiting from renting space on its billboards to wireless carriers. Rather than constructing new towers, adding equipment to existing structures is far cheaper. For Outfront, it provides a way to get two rents out of one billboard.
This has helped the firm drive FFO since its IPO in 2014.
OUT isn’t without risks as its debt is a little on the high side. This and its weird nature help explain why shares of the REIT can be had for a low P/FFO 11.21. However, its FFO more than cover its debts and its 6.51% dividend.
For investors looking to spice up their REITs portfolio, OUT could be a welcome addition.
REITs That Are Major Bargains #5: Annaly Capital Management (NLY)
Forward P/FFO: 10.03
If equity REITs have dragged their heels since the Fed began tightening, then the mortgage REITs (mREITS) have really been hit hard. mREITS invest in mortgages, loans and other debt tied to properties. The sector will also provide direct financing for new and existing construction as well. Add a dose of leverage, and you have a recipe for some pretty significant dividend yields.
So higher interest rates hit them twice- once on the leverage they have and two on the fact that people flee high yielding securities during rising rate environments.
But in that, investors have the opportunity to load up on one of the biggest and best in the sector at just 10x funds from operations.
Annaly Capital Management, Inc. (NYSE:NLY) is the king of the mREITS and invests in a variety of agency (think government-backed) mortgage securities, collateralized mortgage obligations and other mortgage-related debt. Perhaps more importantly, NLY was early to the Fed rate hike game and begun the process of deleveraging and reducing its borrowing costs long ago. That gives it an edge over other REITs in the sector.
For investors, there are a lot of moving parts to an mREIT, but with a 9.65% yield and a cheap price, Annaly makes sense looking at seriously.
REITs That Are Major Bargains #6: Ashford Hospitality Trust (AHT)
Forward P/FFO: 4.58
Talk about being left for dead. After being spurned in a major merger, Ashford Hospitality Trust, Inc. (NYSE:AHT) could be one of the cheapest REITs you can buy.
AHT used to be a straight lender of debt for hotel and lodging properties, but after getting crushed during the recession, AHT refocused itself into owning more properties directly. Today, the REIT’s portfolio of owned hotels consists of 116 properties with more than 25,000 rooms. The vast bulk of these are upper-tier brands catering to business travelers and recession-resistant consumers.
This means that AHT has been able to score higher RevPAR metrics and in fact, have been able to produce the highest RevPAR gains relative to their peers for the past three years.
Who needs that merger anyway?
Not investors looking to score a 7.93% dividend. There is some risk with AHT, but those risks are more than compensated for with its super low price.
REITs That Are Major Bargains #7: Simon Property Group (SPG)
Forward P/FFO: 14.53
There are mall REITs and then there are mall REITs. Simon Property Group Inc (NYSE:SPG) certainly fits into the latter camp. Simon is one of the largest retail real estate property owners in the world. The firm owns more than 230 malls, outlets and power centers across the globe.
But the real key for SPG and its shareholders is that the vast bulk of that is prime Class-A spaces. Which is a polite way of saying malls that are in affluent areas with real foot traffic and very high sales per square foot. Basically, they’re as online proof as they come. And that’s benefited the king of malls in a big way.
FFO metrics continue to grow at SPG. Over the last five years — from 2011 to 2016 — FFO per share has grown at a compound annual growth of rate of approximately 13%. So far, 2017’s FFO numbers have jumped 7.6%. Dividends at the giant have also followed suit.
And yet, the retail drop-off has SPG now trading for a P/FFO of just over 14. While that may seem super cheap, it’s very cheap given Simon’s history and the premium it normally trades for. And let’s not forget its dividend of 4.59%.
This one of best REITs going for a song. Investors should snag this one up today.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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Category: REITs
