The S&P 500 recently closed 20% above its bottom from last October. For some, a 20% gain off the bottom marks the beginning of a new bull market. However, others like to see the market reach a new all-time high before declaring that it's in a fresh bull market. There is still a ways to go before the market reaches that second threshold.
Whether we're in the early stages of a new bull market or not, many stocks still haven't recovered from their bear market lows. Because of that, investors still have time to buy some high-quality stocks before they take off. Alexandria Real Estate Equities (ARE -0.90%), Prologis (PLD 0.69%), and Simon Property Group (SPG -0.26%) stand out to a few Fool.com contributors because they haven't yet taken flight. Here's why investors will want to buy these dividend-paying stocks before the bull market hits its full stride.
This REIT has beaten the market for decades and is selling for a beaten-down price now
Marc Rapport (Alexandria Real Estate Equities): Inflation and interest rate hikes appear to be cooling, the stock market seems to be heating up, and it's a good time to take a quick look for bargains that may not be in the basement for long.
Consider Alexandria Real Estate Equities, a real estate investment trust (REIT) that provides big pharma and about 1,000 other life science and biotech companies, universities, and institutes with lab and office space in 30 office clusters in and around San Diego; Boston; Seattle; San Francisco; the Research Triangle in Raleigh, North Carolina; and Washington, D.C.
These are reliable rent-payers depending on Alexandria to provide the kind of specialized space they need for the kind of work that doesn't lend itself to being done at home. The REIT's 47 million rentable square feet stay about 95% occupied and it has a strong development pipeline that also already is filling up quickly.
Data source: YCharts
Indeed, this is an office REIT with a difference, but its shares are not currently priced as such. As you can see above, Alexandria shares lag behind both the S&P 500 and the REIT sector itself, as represented by two benchmark exchange-traded funds.
This could be a temporary aberration. Alexandria has nearly doubled the S&P 500 in total return since the REIT's initial public offering in 1997 and it's on a run of 12 straight years of dividend increases. With a current yield of about 4% and an estimated upside of about 36% from its current share price of about $122, according to analysts, now may be a very good time to buy some shares before a new bull market takes notice.
Still in a deep bear market
Matt DiLallo (Prologis): While a new bull market might be emerging, Prologis stock hasn't received the memo. The leading industrial REIT is still down about 30% from its peak in the early days of the bear market. Because of that, investors still have time to buy shares at a discount before the next bull market really takes hold.
There has been a huge disconnect between Prologis stock and its underlying business. While its shares have tumbled, its business continues to thrive. Occupancy was a strong 98% during the first quarter, while cash same-store net operating income (SSNOI) grew by 11.4%, an all-time high. A big driver was rent growth as existing leases expired, and the company captured higher market rates. The company's net effective rent change was a jaw-dropping 68.8% in the period, also an all-time high.
Given long-term leases currently securing its properties, Prologis is only capturing a fraction of the surge in market rents. However, as those legacy leases expire, Prologis can sign new ones at higher market rates. The company estimates its SSNOI will grow 8% to 10% annually for several years. That assumes no further market rent growth, which seems unlikely. Prologis expects market rents to rise by 10% globally this year despite its view there will be a modest recession.
With Prologis stock lagging behind the broader market, even though its earnings continue to grow, it's trading at a much cheaper valuation. That might not last much longer if a new bull market takes hold. Because of that, investors should grab some shares before they take off and while enjoying the 2.9% yield until they do.
The regional bank sell-off presents an opportunity
Brent Nyitray (Simon Property Group): Simon Property Group is one of the leading operators of shopping malls, as well as outlet centers Premium Outlets and the Mills. As of March 31 the company operated 196 income-producing properties in the U.S. and overseas. Simon also owns an 80% non-controlling interest in Taubman Center, which is another mall operator. Simon owns an interest in 34 Premium Outlets and malls overseas. Finally, it owns a 22% interest in Klepierre, a French retailer.
Like most REITs, Simon Property Group has struggled over the past year or so as the Federal Reserve has hiked the federal funds rate. As you can see in the chart below, Simon Property Group has underperformed the S&P 500 substantially this year.
Data source: YCharts
Rising interest rates are a headwind for all REITs, but the collapse of Silicon Valley Bank in March regional bank crisis triggered concern about the broader financial industry -- some of which may haver spilled over to the commercial real estate market. Whatever the reason, the lack of additional stress in the regional banking system seems to indicate the crisis might be over. If so, then Simon might be a good candidate to rebound.
Simon recently upped its forecast for 2023 funds from operations (FFO) per share to come in between $11.80 and $11.95. REITs tend to use FFO to describe earnings because net income under generally accepted accounting principles (GAAP) tends to understate cash flow because of high depreciation charges, which are a non-cash expense. Simon recently increased its dividend from $1.80 to $1.85 per share. The annual dividend works out to $7.40 per share and a fat yield of 6.7%. This means the annual dividend is well covered by funds from operations per share. If we are looking at another bull market, we should see continued strength in the consumer which will benefit Simon.
