Real estate investment trusts (REITs) make it easier than ever to become a real estate investor. REITs acquire and rent out properties and pass the profits to shareholders as dividends. Investors can benefit from the cash flow that real estate produces without having to deal with the headaches of owning actual property, like maintenance or the inability to sell it quickly.
You can buy different types of REITs that operate in various areas of real estate, from retail buildings to data centers to residential property. Here are three undervalued REITs to consider today for a diversified income-producing portfolio.
1. National Retail Properties
Retail properties are one of the most common categories of real estate, and National Retail Properties (NNN 0.44%) is one of the most established retail REITs on the market. The company owns roughly 3,223 single-tenant properties across 48 states, renting to such businesses as convenience stores, fast-food chains, and restaurants.
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National Retail Properties has a long track record of steady growth; it's a Dividend Aristocrat that's raised its dividend for 32 consecutive years, including through the pandemic and any recession over the past three decades. The dividend yield is currently 4.9%. The company has $171 million in cash on hand, plus an additional $1.1 billion credit line with no significant debt due until 2024, so investors can feel good about the payout safety.
The company just finished its 2021 fiscal year and earned adjusted funds from operations (FFO), which is how REITs measure the profits they produce, of $3.06 per share. This values the stock at a price-to-FFO ratio of 14, which seems attractive considering the company grew FFO by 22% over 2020, and the dividend offers investors proven, meaningful income.
2. Crown Castle International
The world is becoming increasingly connected, but the infrastructure that makes this possible often goes underappreciated by investors. Crown Castle International (CCI -0.03%) is a REIT and the largest provider of shared communications infrastructure in the United States. It operates roughly 40,000 cell towers, 115,000 small cells, and more than 80,000 miles of fiber optics. Tenants pay Crown Castle to use its infrastructure to broadcast voice, data, TV, radio, and more.
The company established its dividend in 2014 and has increased it in each of the eight years since then. The payout today offers a dividend yield of 3.6%. Management targets long-term dividend growth averaging 7% to 8% per year, so investors have a solid mix of income and growth.
The company has been investing heavily to grow its infrastructure, more than the business generates in cash, requiring Crown Castle to issue new shares to raise funds. This is a risk that investors need to keep in mind although the company remains investment grade by credit agencies, and the demand for network coverage as 5G rolls out could create strong growth for Crown Castle in future years. The stock trades at a price-to-FFO of 23, which seems reasonable for long-term investors if the company can grow its business an average of 7% to 8% annually over the long term.
3. Simon Property Group
Malls and shopping centers were hit especially hard during COVID-19 lockdowns as forced closures stressed many retail companies in those properties. Simon Property Group (SPG -0.68%), which owns and leases shopping malls and entertainment venues, wasn't spared; the company's operating results struggled in 2020 from tenants unable to pay rent. The company produced FFO per share of $9.11, taking a massive $2.67 per share hit related to the pandemic. The company also had to cut its dividend to keep its losses to a minimum.
However, Simon Property Group is rebounding in a big way. The company recently wrapped up its fiscal 2021 that saw FFO per share of $11.94, a 31% year-over-year increase. The company is also rebuilding its dividend; it offers a yield of 4.7%, despite remaining below its pre-pandemic amount. This is solid for income investors, and management will likely continue steadily bringing the payout to its former glory.
Management issued 2022 guidance for FFO of up to $11.70 per share, reflecting some headwinds from currency exchange and recent investments made into growth. However, the stock's current price-to-FFO ratio is less than 12 currently. With the pandemic fading, the company could finally get back to its long-term growth plans -- and so the current price could be an excellent opportunity for investors looking to hold the stock for the years ahead.
