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3 Cheap REITs to Buy Right Now

Jul 18, 2020 by Kevin Vandenboss

While prices are starting to catch back up with value, there are still some bargain REITs that are attractive buys. Sabra Healthcare REIT (NASDAQ: SBRA), MGM Growth Properties (NYSE: MGP), and National Health Investors (NYSE: NHI) are all priced at a lower FFO multiple than their peers and are positioned to see solid growth over the next few years.

Sabra Healthcare REIT

Sabra Healthcare REIT, Inc. is a real estate investment trust that invests in senior housing, skilled nursing facilities, and specialty hospitals.

Sabra is trading at a discount that's hard to ignore. Their current FFO multiple is only 7.22x and is priced at about 77% of its estimated net asset value. This isn't the lowest FFO multiple Sabra has seen, but it has spent most of its time above 10x.

This REIT hasn't been the most consistent over the years in terms of dividends, but they have stayed above 5% for the past nine years and have averaged 9.56% over the past four years.

Senior housing development has been a popular trend over the past few years, and the market became a bit saturated. I believe the COVID-19 pandemic will thin the herd a little to bring some more demand back into the market. The players that come out of this in one piece should benefit from some additional growth.

I'm confident that Sabra Healthcare will be one to stay strong through the rest of the current crisis. They have a unique advantage in the market over many other senior housing and skilled nursing investors because they were formerly operators themselves. This gives them valuable insight when choosing investments, new markets, and operators they choose for their facilities.

They have a healthy balance sheet with a net debt to adjusted EBITDA of 4.97x and 36% debt to asset value. They're also sitting on more than $950 million liquidity between unrestricted cash and available borrowing on their revolving credit.

Overall, Sabra Healthcare REIT is currently priced to sell and is paying out a high dividend. While it may not get back to its 52-week high for a while still, it should continue to provide some nice dividend income while it works its way back up.

MGM Growth Properties

MGM Growth Properties is a gaming REIT, which is a relatively new sector with only three REITs. As the name suggests, MGM Growth Properties owns the real estate operated by MGM Resorts International (NYSE: MGM). These casinos and resorts include several of the most well-known casino brands such as Mirage, Mandalay Bay, Luxor, and others.

MGM Growth Properties is a great deal right now with an FFO multiple of 7.41x and at a 30% discount to its estimated net asset value (NAV). According to Green Street Advisors Gaming REIT Sector Primer, gaming REITs have been priced at a 26% premium over NAV on average over the past five years.

The COVID-19 pandemic has certainly been the cause of this substantial price drop. Unlike many other REITs, however, MGM Growth Properties has continued to collect its rent under their master lease with MGM Resorts.

MGM Resorts is sitting in a very strong cash position, with $5.42 billion in available liquidity between cash and available revolving credit. MGM Resorts has also been able to reduce their operating costs substantially to retain cash through the pandemic. At this point, there is little concern that they won't be able to meet their rent obligations to MGM Growth Properties.

The casino and resort industry is likely to have a long road to recovery, but shares of MGM Growth Properties will most likely increase in value during that time. Right now is the best time to buy this REIT and collect a nice dividend yield while watching the shares grow in value over the next few years.

National Health Investors

National Health Investors owns a portfolio of healthcare properties, mostly made up of senior housing and skilled nursing facilities. The REIT works with some of the top operators in the country, including National Healthcare Corporation (NYSE: NHC), Bickford Senior Living, Holiday Retirement, and others.

This REIT has historically been a strong performer, with significant FFO and dividend growth year over year. The growth and dividends of this REIT make it attractive even in normal market conditions, but at an FFO multiple of 10.32x, compared to its average multiple of 13.83 over the past three years, it looks even better.

National Health Investors has seen minimal impact on their financials from the COVID-19 pandemic. They collected 99.4% of their rent in June and 100% in May. So far, their NNN tenants have been in a strong enough financial position to continue covering their rental obligation, even with reduced occupancy.

If this situation changes, and some of their operators begin running out of cash, the REIT has provided mezzanine finance and working capital loans to its tenants in the past, and they could actually benefit long term by offering financing to their operating tenants.

The current pandemic has placed some additional risk on healthcare REITs, and on all healthcare companies in general. It's very likely that occupancy rates won't reach pre-COVID-19 levels for a few years as people are finding alternative options and fears continue to linger.

However, the reduced revenue for the operators shouldn't be so significant that some operational adjustments and cost cutting won't be able to protect the bottom line. If the COVID recovery continues dragging out and the financial impact starts to hit the REIT directly, they have prepared themselves by increasing their liquidity position with a $100 million term loan.

Even with the additional $100 million in debt, they still have a healthy balance sheet with a 5.46 debt-to-equity ratio. Unless things get drastically worse, I see this REIT's shares heading back to their previous value. Buying NHI at today's discount should give you a growing dividend income with long-term growth.

Should you take advantage of these bargain REITs?

Investors have found some incredible buying opportunities on REITs during the past few months, and many of them are already close to their pre-COVID-19 prices, or close to it. Luckily, there are still a handful of cheap REITs left that have a promising future of growth and dividend income. These three REITs have suffered minimal financial damage from COVID-19 and have strong enough liquidity positions to get through almost any potential hits they may take. If you want to take advantage of some of the last remaining deals on cheap REITs, these are the first three to look at.

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Kevin Vandenboss has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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