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3 Cheap REITs to Buy Right Now

Nov 11, 2020 by Matthew DiLallo
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Investors have dumped real estate investment trust (REIT) stocks this year due to concerns about how much the COVID-19 outbreak will impact rental collection and occupancy levels. Because of that, the average REIT is down double digits this year, according to Nareit.

While some of those selloffs seem justified, others don't. Because of that, some REITs look much cheaper right now. Three discounted REITs that should pique the interest of value investors are Medical Properties Trust (NYSE: MPW), SL Green Realty (NYSE: SLG), and W.P. Carey (NYSE: WPC).

An inexpensive healthcare play

Shares of healthcare REIT Medical Properties Trust have declined by about 8% this year, pushing its dividend yield up to 5.6%. The slump comes even though the hospital owner has been having another excellent year. It collected nearly all the rent and interest payments due from its tenants in the third quarter, which, when combined with roughly $2.9 billion of acquisitions this year, helped drive its normalized FFO per share up 24% during the period. It's well on track to achieve its full-year normalized FFO guidance of $1.68 to $1.71 per diluted share.

Medical Properties currently trades at about $19 per share, roughly 11 times its normalized FFO. That's dirt cheap for a REIT, especially one growing as fast as Medical Properties Trust. Meanwhile, it sees more growth ahead as it expects to acquire a similar amount of properties next year, which could drive another double-digit per-share increase in its normalized FFO.

High-quality office space on sale

SL Green Realty's stock has tanked 38% this year, driving its dividend yield up to 6.2%. That selloff comes even though the office REIT is holding up reasonably well. It collected 91.8% of the rent it billed during the second quarter and 92.6% of its third-quarter billings despite the outsized impact COVID-19 had on Manhattan, where it's the leading office landlord.

Meanwhile, it's seeing some real signs of life in that market. It has a solid leasing pipeline, which has SL Green on track to achieve its lofty goal to lease 1.2 million square feet this year. Meanwhile, the demand for high-quality trophy properties didn't dry up like some expected, which was clear from its recent sale of 410 Tenth Avenue. It fetched a $952.5 million price tag for that development, the largest commercial property sale since the pandemic started and a significant profit on its initial investment.

The deal highlights its properties' intrinsic value while giving it the cash to pay down debt and repurchase its cheap stock. It has already repurchased 6.5 million of its shares via its $3 billion buyback program. To put that size into perspective, SL Green's current market capitalization is only $4.1 billion, which shows just how cheap it is these days.

A low-cost way to play the fast-growing industrial sector

Diversified REIT W.P. Carey has lost about 14% of its value this year, pushing its dividend yield up to 6%. Weighing on the REIT has been concerns about how well the company's portfolio would hold up during the pandemic, given its exposure to the office and retail sectors, which contribute 23% and 17% of its ABR, respectively. However, the company received 98% of the rent it billed during the third quarter and 99% in October, showing its tenants' resiliency.

W.P. Carey has increased visibility into its expected AFFO this year, which led it to reinstate a guidance range between $4.65 to $4.75 per diluted share. With the stock recently trading around $68 a share, W.P. Carey sells for roughly 14 times AFFO. That's a pretty cheap level for a REIT, especially one with a significant industrial portfolio (the fast-growing warehouse sector contributes 23% of its ABR while its total industrial exposure is 47%) where many REITs trade at more than 25 times AFFO. That makes it a cheaper way to invest in that highly valued sector.

Dirt-cheap REITs

Medical Properties Trust, SL Green Realty, and W.P. Carey are among many REITs that sold off this year. However, those selloffs seem overblown, given their solid rental collection rates and the underlying value of their portfolios. Because of that, value investors can pick up these REITs at cheaper prices while also collecting higher dividend yields. That sets them up to potentially earn attractive total returns as these REITs recover.

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Matthew DiLallo owns shares of Medical Properties Trust and W. P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.