The No. 1 adage of investing is, “Buy low, sell high.”
When investors examine real estate investment trust (REIT) stocks, they look for those that are trading well below their true market value, with the idea they may revert to the real value in the future. But how do you know whether a REIT is undervalued?
REITs can be evaluated in two ways. First, if the current dividend yield is higher than its long-term average, the REIT is said to be undervalued. If the yield is less than its long-term average, the REIT is overvalued.
Second, we look at funds from operations (FFO) in relation to the stock price. The formula P/FFO means to divide the stock price (P) by the FFO. This is similar to P/E ratios in non-REIT stocks. If the P/FFO is substantially lower than its same-sector peers (healthcare, retail, industrial, etc.), then the REIT is said to be undervalued.
Given the criteria above, here are three REITs that appear to be currently undervalued.
|
REIT NAME |
P/FFO |
P/FFO SECTOR AVG |
RECENT DIVIDEND YIELD |
5-YR DIVIDEND YIELD |
|
SIMON PROPERTY GROUP INC. |
9.21 |
13.46 |
6.42% |
5.84% |
|
SL GREEN REALTY CORP. |
5.85 |
13.96 |
9.47% |
4.84% |
|
BRANDYWINE REALTY TRUST |
4.69 |
13.96 |
11.4% |
5.70% |
Simon Property Group Inc. (NYSE:SPG) is an Indianapolis-based retail REIT that owns and leases shopping malls, restaurants, outlet centers and entertainment venues. A member of the S&P 100, Simon Property Group is one of the largest shopping mall REITs in the U.S. and also owns properties in Europe and Asia.
October was an extremely difficult month for most REIT stocks, and Simon Property Group’s stock fell to a mid-month low of $86.02 but has since rebounded to $109. Its $7 annual dividend is now yielding 6.4%.
One thing to admire about Simon Property Group is its resiliency. In 2020, when COVID-19 triggered a huge price decline, the stock traded below $37. But within 2½ years it had risen to $160. Could history repeat?
SL Green Realty Corp. (NYSE:SLG) is the largest owner and landlord of New York City offices, with 62 buildings totaling 33.6 million square feet.
Inflation and recession fears have driven SL Green’s price back down to a recent 52-week low of $35.49. Still, the forward price-to-earnings (P/E) ratio of 10 is reasonable and third-quarter funds from operation (FFO) of $1.66 will easily cover three monthly dividend payments of $93.25. The $3.73 annual dividend now yields 9.4% and is 91% higher than its five-year average yield.
History has shown that inflation and recessions come and go, so SL Green at its recent price near $40 could prove to be a bargain going forward.
Brandywine Realty Trust (NYSE:BDN) is a Philadelphia-based commercial REIT that owns, develops, leases and manages 175 properties located from its home city to Austin, Texas.
Brandywine Realty Trust’s 52-week range is $5.95 to $14.88, but like so many other REITs, its stock price has been decimated by higher interest rates this year.
Brandywine’s quarterly dividend of $0.19 has been a stable but slow grower over the past five years and presently yields over 11% annually.
Third-quarter 2022 FFO of $0.36 was a penny better than the third quarter of 2021, so covering the dividend payment is no problem. The stock is up about 10% since hitting the lows a few weeks ago. With its stable dividend and improving FFO, Brandywine Realty Trust could see additional appreciation in the near future.
Read next: This Little-Known REIT Is Producing Double-Digit Returns In A Bear Market: How?
See more real estate investment news and insights from Benzinga
- The banking and investment platform Nada has launched its latest product Cityfunds, the first index-like fund for a single city’s residential real estate market. The funds have a minimum investment of $250 and a projected IRR of 15%.
- Q3 results show that Fundrise is beating the market again. Its Growth eREIT III is up 17.2% YTD.
- Read more…
