The real estate investment trust (REIT) sector has cooled off considerably this year. Shares of the average REIT ended April down more than 8% on the year, weighed down by higher interest rates and the overall sell-off in the stock market. That's quite a change from last year when REIT's delivered market-beating total returns of more than 40% on average.
One of the positives of this sell-off is that valuations across the sector are much cheaper. Some REITs are starting to look like downright bargains, including Stag Industrial (STAG -1.17%), Medical Properties Trust (MPW -0.80%), and Store Capital (STOR).
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Looking like a steal these days
Shares of Stag Industrial have tumbled more than 28% this year. That's a staggering drop considering the company's performance. The industrial REIT generated $97.1 million, or $0.53 per share, of core funds from operations (FFO) during the first quarter, up 8.2% on a per-share basis. The company noted that it signed 3.1 million square feet of leases in the quarter at an average rate of 15.2% above the previous rate on the same space. The company also acquired $166.4 million of properties in the quarter and had a robust pipeline of $3.7 billion of potential acquisitions. It should have no trouble delivering on its 2022 acquisition target of $1 billion to $1.2 billion of properties.
With the REIT's stock price tumbling, it now trades at about 19 times its 2022 FFO estimate. That's much lower than the industrial REIT sector average of more than 27 times FFO. While Stag Industrial isn't a pure-play on the fast-growing warehouse sector like some rivals, it provides ample exposure to that property class at a much cheaper valuation. Meanwhile, Stag's sliding stock price has pushed the yield on its monthly dividend up to an attractive 4.3%, well above the REIT sector's roughly 3% average dividend yield.
Trading at a healthy discount
Shares of Medical Properties Trust have slumped more than 25% this year. One issue plaguing the hospital-focused healthcare REIT was a bearish report by an analyst who tapped it as their firm's best new short idea. They said the company's core business is deteriorating because of an undiagnosed tenant issue.
The REIT tried to put those concerns to rest when it reported its first-quarter results. It posted a 12% increase in normalized FFO. That enabled the REIT to increase its dividend by another 4%, its ninth straight year of growing the payout. Medical Properties Trust also highlighted its successful capital recycling program of selling select hospitals and stakes in a portfolio of properties so it can redeploy the proceeds into highly accretive acquisitions. The REIT believes it can continue recycling capital, giving it the funds to acquire another $1 billion to $3 billion of properties this year without issuing any equity. That will prevent it from diluting investors, given the decline in the share price. Meanwhile, the REIT did a deep dive on its conference call, highlighting the value of its properties, the structure of its leases, and the strength of its operators.
If there's a silver lining to Medical Properties Trust's sell-off, the stock is now much cheaper. The REIT currently trades at around 11 times its 2022 FFO estimate, well below its peer group average of more than 16 times FFO. It also offers an even more attractive dividend yield of around 6.6%.
Bargain shopping
Store Capital stock is down more than 23% this year. That has the retail REIT trading at around 13 times its 2022 FFO estimate, which is below the roughly 15 times of its peer group. As a result, Store Capital now offers a dividend yield approaching 6%.
What's worth noting about Store Capital is that it doesn't just own any retail property. It focuses on highly profitable locations essential to the operator's business. This focus on profit-center real estate has enabled the REIT to deliver sustainable growth and attractive returns.
Despite the changing market conditions resulting from rising interest rates and inflation concerns, Store Capital is having no trouble finding or financing acquisitions. That led it to recently boost its acquisition and adjusted FFO per-share guidance ranges for 2022. That rising income stream will enable the REIT to continue growing its dividend.
Great REITs at lower prices
The sell-off in the REIT market has Stag Industrial, Medical Properties Trust, and Store Capital trading at bargain-basement prices. All three REITs have tumbled more than 20% this year, pushing their valuations well below those of their peers. They look like bargain buys these days.
