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3 Cheap REITs to Buy Right Now

Not all stocks are expensive -- check out these three REITs.


[Updated: Apr 05, 2021 ] May 22, 2020 by Matt Frankel, CFP
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The stock market has rebounded incredibly over the past year or so, and the S&P 500 is near its all-time high as we head into April. However, that doesn't mean all stocks are expensive.

Specifically, there are some excellent bargains to be found in the real estate sector, and some could be big beneficiaries of the economy getting back to normal in a post-COVID world. Three in particular I have my eye on for patient, long-term investors are American Campus Communities (NYSE: ACC), STORE Capital (NYSE: STOR), and Seritage Growth Properties (NYSE: SRG).

College should be (mostly) normal by fall

American Campus Communities was certainly disrupted by the COVID-19 pandemic, to put it mildly. Rental income fell by more than 7% in 2020 and same-store NOI dropped by 11%, thanks to rent relief, waived fees, and other lost revenue related to campus closures and student financial strain.

However, with the stock 12% below its pre-pandemic peak, it could be a great bargain. The company remains financially solid, and we're hearing great news when it comes to on-campus instruction plans, even in notoriously cautious areas like California. American Campus Communities pioneered the purpose-built student housing industry in the 1990s and is in a great position to benefit from the world gradually getting back to normal.

A great income stock with tremendous growth potential

STORE Capital wasn't quite as impacted by the pandemic as some of its retail-focused peers, but it wasn't exactly unscathed either. About one-third of STORE's portfolio is made up of highly affected industries, such as movie theaters, family entertainment centers, and fitness centers.

However, the company's business has rebounded nicely. Rent collection was at 93% of billed rent in February, up from about 70% at the peak of the shutdowns. Adjusted FFO declined by 8% year over year in 2020, which isn't bad at all for a retail and service-focused real estate investment trust (REIT) during a global pandemic.

Perhaps the most exciting part is STORE's growth potential. Unlike many retail REITs, STORE is in all-out growth mode. The company spent over $1 billion on acquisitions in 2020 and plans to spend at least that much in 2021. With record-low borrowing rates and average cap rates (yield on cost) of more than 8% on newly acquired properties, it is not hard to see why.

A high-risk but higher-reward play on mixed-use real estate

Finally, Seritage Growth Properties is certainly the highest-risk stock on this list, but it also has tremendous growth potential if things go well. If you aren't familiar, Seritage is a REIT that was created in 2015 for the specific purpose of acquiring a portfolio of old Sears and Kmart properties and gradually redeveloping them over time.

Seritage currently owns about 180 properties with 28.5 million square feet of space. And out of this, it has only redeveloped (and therefore is collecting rent) from about one-third. The rest are projects Seritage will eventually develop into top-notch mixed-use properties, including some massive premier assets that have tons of value-creation potential.

The problem is that development costs money and has quite a bit of intrinsic risk, which is why Seritage is currently only valued at about $700 million. That's about $25 per square foot of space in its portfolio, and high-quality space can rent for more than that each year. In a nutshell, Seritage has an opportunity to create billions in value over the next decade or so, but it isn't without its risks.

Approach these with patience

As a final thought, I own all three of these REITs in my portfolio, but it isn't because I think they're going to perform well this month, or even this year. Instead, I own them because I feel they're attractively valued and have the potential to produce market-beating returns over time. All three could be big winners of the pandemic coming to an end, but it isn't likely to be a completely smooth road. Approach these potential investment opportunities with that in mind.

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Matthew Frankel, CFP owns shares of American Campus Communities, Seritage Growth Properties (Class A), and STORE Capital. The Motley Fool owns shares of and recommends American Campus Communities, Seritage Growth Properties (Class A), and STORE Capital. The Motley Fool has a disclosure policy.