With the stock market near all-time highs and interest rates near all-time lows, investors are looking outside of typical stocks for returns.
Real estate is one popular alternative, and Equity Residential (NYSE: EQR), Prologis Inc (NYSE: PLD) and Ventas, Inc. (NYSE: VTR) are three of the best high-yield value Real Estate Investment Trusts (REITs) in the market today.
REIT Valuations Are Unique
Value investors know that the price-to-earnings ratio is the traditional starting point for determining whether or not a stock is cheap. REITs, however, require a bit more analysis.
Instead of measuring a REIT’s earnings per share, traders instead look for a metric called funds from operations (FFO). FFO is calculated using the following formula:
FFO = net income + depreciation + amortization – gains on sales of property
For most companies, assets depreciate in value overtime. For REITs, the opposite is often true — property values tend to increase over time. FFO corrects for this phenomenon. In addition, FFO smooths out the earnings fluctuations that happen as a result of the buying and selling of properties.
Real estate investors can consider a REIT’s FFO per share analogous to a stock’s EPS. In that respect, P/FFO per share is the REIT equivalent of P/E ratio.
The REIT Baselines
The iShares Dow Jones US Real Estate (ETF) (NYSE: IYR) is a popular exchange-traded fund that owns only shares of REITs. The fund’s top 10 holdings make up more than 35% of its overall portfolio. The average P/FFO per share among these top 10 holdings is currently 18.5.
REIT traders can use this number as a baseline for determining which REITs are trading at a discounted valuation and which ones are trading at a premium valuation.
Of course, a major part of a REIT’s appeal is also its yield. REITs are required to distribute at least 90% of earnings to shareholders in the form of dividends. That rule typically results in some appealing yields for investors, especially in the current low-interest-rate environment.
The 30-day SEC yield is 3.2%, much higher than the S&P 500 average yield of 2%.
Best Value REITs
Using the value metrics mentioned above, EQR, PLD and VTR are three of the best value REITs in the market. Though none of them are exceptionally high yield, they all offer yields above 3%.
VTR is a healthcare REIT that owns properties in three business segments: triple-net leased properties, senior living properties and medical office buildings (MOBs). VTR’s current P/FFO per share is only 15.6 and its dividend yield is 4%.
PLD is a REIT that owns buildings that serve sectors such as automotive, transportation, pharmaceuticals and general consumer goods. The REIT’s current P/FFO per share is only 13, and the REIT yields 3.2%.
Finally, EQR is a REIT that focuses on the acquisition, development and management of apartment properties in core metropolitan areas like Boston, New York, San Francisco, Seattle, Southern California and Washington, D.C. The REIT has a minuscule P/FFO per share of only 5.2, and its dividend yield is 3.1 %.
Of course, much like P/E ratio, REIT investors should remember that FFO growth is an important factor to consider as well. However, at today’s prices, VTR, PLD and EQR certainly seem to be some of the cheapest high-yield real estate investment options.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.