Despite their superior yields, real estate investment trusts (REITs) are often overlooked and undervalued by investors when compared to other dividend-paying stocks. Since REITs must pay 90% or more of taxable income as dividends, investors can lock in yields that are often two to five times more than the S&P 500.
Rising interest rates and the recent market sell-off have pushed many REITs down 20% or more this year. But today's beaten-up pricing is to investors' advantage. Three stocks fool.com contributors believe are wildly undervalued given today's pricing are Medical Properties Trust (MPW +2.17%), STAG Industrial (STAG +0.66%), and Prologis (PLD 0.60%).
Here's a closer look at each company and why investors should buy these high-dividend stocks hand over fist.
Medical Properties Trust is a high-yielding bargain at this price
Marc Rapport (Medical Properties Trust): Investors in Medical Properties Trust may feel pretty sick right now, given that the healthcare REIT's share price has been beaten down by 50% this year. But there's reason to expect this patient to recover.
For one, this Alabama-based trust is one of the largest private owners of hospitals in the world, with about 435 facilities in 10 countries on four continents. That's a pretty essential business.
NYSE: MPW
Key Data Points
Concerns about the financial health of one of its largest tenants, plus higher interest rates that make acquisitions more costly, have fueled this sell-off. But the importance of local hospitals in their communities -- which makes closing them less likely than shuttering a big-box store -- and the long-term nature of these leases (averaging 17.6 years) argues the other way.
Those who agree with their wallets will enjoy a yield of nearly 10%, well above the stock's historical norms, from a company that has raised its dividend for eight straight years that include the pandemic.
By one frequently used measure of a stock's valuation, Medical Properties Trust could be deemed a screaming buy. That's the ratio of price-to-funds from operations (FFO) per share. The norm here is about 20. Something close to 10 is considered a value buy.
The trust is currently guiding for 2022 per-share FFO in a range of $1.80 to $1.82. At the high end, that's a price/forward FFO ratio of 6.47 times with a share price of $11.79 at the time of this writing. For a company with this record and a portfolio and balance sheet of this quality, that's extremely cheap.
Analysts give the stock an upside of nearly 47% at a consensus target price of $17.27. Their consensus is that Medical Properties Trust is a moderate buy. I own shares of it in my own income-focused retirement portfolio and plan to add more soon.
STAG Industrial offers long-term growth at a huge discount
Kristi Waterworth (STAG Industrial): Many investors like to put their money into companies they know and love, like the big-box retailers and discount club stores of the world. I, on the other hand, am always on the lookout for great value in something totally unconventional like industrial REITs. Right now, STAG Industrial holds my heart as a wildly undervalued stock.
As of Dec. 14, it closed at just $34.07 per share, but the funds from operations number (the magic number that helps determine just how much dividend this stock will pay out) is $2.17 per share for the year ending in Q3 2022. That gives it a multiple of 15.7, well within the bargain range.
Despite the lack of love from the market right now, STAG Industrial is killing it as a business. Not only does it have a low amount of liabilities versus its assets, allowing it to be more financially flexible as economic challenges arise, its funds from operations is only increasing year over year. This fundamental figure is up nearly 20% in Q3 2022 when compared to Q3 2021.
This has been made possible by smart buying and selling of industrial properties: disposing of those that weren't profitable enough and picking up some that promise to be long-term winners. A net gain of just over 3 million square feet of rentable space in hot markets like Atlanta, Fresno, El Paso, Portland, and Louisville will continue to push profits and FFO upward in the coming year.
On top of that, the average occupancy rate has increased year over year, from an already-winning 97.5% in Q3 2021 to 98.7% in Q3 2022. With tenants like Amazon, FedEx, and Ford Motor Company in industries that include logistics, industrial goods, consumer goods distribution, food and staples retailers, and healthcare equipment, it's not hard to see how STAG Industrial is a favorite for many REIT investors.
This premier REIT is a screaming buy at today's value
Liz Brumer-Smith (Prologis): Prologis is the largest publicly traded REIT by market capitalization and the largest industrial operator in the world. The company owns and leases nearly 5,000 industrial properties to high-quality tenants across four continents, and it usually trades at a premium, upwards of 25 times its FFO.
NYSE: PLD
Key Data Points
But recent market volatility and concern that the demand for industrial space may be waning has pushed the stock down 24% this year. That means it's currently trading around 23 times its projected FFO for the full 2022 year.
A REIT with a price-to-FFO of 23 times by REIT standards would be considered richly valued. But given Prologis' size and reach in a fast-growing industry, it's a great price for such a premier company. Prologis has outperformed the S&P 500 for the past five, 10, 20, and 25-year periods while also growing its dividend by 490%. It boasts an A credit rating, has a very conservative balance sheet, and is experiencing incredible growth.
In the third quarter of 2022, it achieved record levels of net rent growth, with rental rates being around 60% higher than the previous year. Its FFO rose by 66% year over year while its net operating income (NOI) increased by 9%. This type of growth in today's sluggish economy is absolutely staggering.
The shortage of high-quality industrial properties across the globe has helped Prologis maintain impressive growth these past few years. And I believe it's a momentum the company can maintain for years to come. Even if it stopped acquiring or developing more properties it would still be able to achieve double-digit NOI growth for several years based on near-term leases up for renewal. I own shares of this premier industrial REIT and could happily buy more at today's pricing.
