There’s no denying that real estate investment trusts (REITs) have a lot to offer investors. Thanks to their tax-structure, REITs pass much of their cash flows back to investors as juicy dividends. This provides them with yields in the 3 to 5% range. At the same time, thanks to rising rents, those dividends continue to grow — which in turn pushes up share prices.
The magic for REITs lies within a number called funds from operations (FFO). FFO is basically the cash flows that REITs have to distribute. Rising FFO numbers simply equals more dividends for shareholders.
But the trick is not to pay too much for those funds.
Just like stocks can be expensive, REITs can also be a bit pricey. But rather than use a price-to-earnings ratio, the best way to look at REITs is via a price-to-FFO. The idea is that you’re not paying too much for those cash flows. And that’s to the recent market hiccups, many real estate investment trusts are trading for bargain levels. Investors can get their rising dividends at a cheaper price point.
With that, here are five top-notch REITs to buy while they’re dirt cheap.
Tanger Factory Outlet Centers (SKT)
Some of the cheapest REITs can be found among the shopping malls and retail owners. And it’s easy to see why. Online shopping and Amazon (NYSE:AMZN) continue to eat many brick & mortar retailers’ lunch. This has resulted in plenty of bankruptcies and store closings. That clearly hurts the owners of shopping malls right in the wallet. But the sector isn’t all doom and gloom. There are bargains to be had, and one of the best could be Tanger Factory Outlet Centers (NYSE:SKT).
SKT’s win lies within its operating markets. Tanger is the biggest REIT focused on outlet shopping — with a portfolio of 40 outlet shopping centers located in 20 states. The kicker is that outlet shopping tends to be “destination shopping.” But SKT’s properties feature plenty of amenities — such as restaurants, movie theaters, and entertainment. This keeps luring shoppers back for the bargains. Moreover, many of these outdoor shopping plazas are located in higher-income areas that are unaffected by recessions and other downturns.
Add in its very conservative balance sheet and you a long runway to fight off online rivals.
The proof comes down to Tanger’s numbers. Despite selling four properties, SKT managed to keep its FFO roughly the same as a year ago. Meanwhile, foot traffic and occupancy numbers continue to rise. And yet, the market is throwing the REIT away with a P/FFO of just 7.31 and big 7.86% dividend yield.
Healthcare remains one of the best long-term sectors for investors. As out population continue to age and grow, more demand is inevitable. That demand won’t just happen towards drugs and equipment, but places to conduct healthcare as well. Some of the best opportunities for investors could be in the real estate related to hospitals, doctors’ offices, senior living facilities, etc.
That could make Ventas’ (NYSE:VTR) cheap P/FFO of 16 a steal for the long haul.
VTR is one of the largest owners of medical real estate. That includes more than 730 senior housing facilities, 350 medical office buildings and 37 research/biotech offices as well as numerous long-term care and skilled nursing facilities. All in all, Ventas owns nearly 1200 different medical-related properties. Turns out that’s a good place to be. VTR just sits back and collects a rent check. The firm doesn’t have to worry about potential regulation, billing of patients or the other hassles of the healthcare sector.
This has translated into a steady diet of FFO increases. Last quarter, reported FFO jumped 2.08% in the last quarter thanks to rent increases and higher billings. As expected, VTR has used those jumps to its cash flows to reward shareholders. Since 2001, Ventas has been able to grow its dividend by 8% annually. That an impressive feat that many REITs can match.
Ventas yields 4.81%.
Douglas Emmett (DEI)
One of the chief sayings in real estate happens to be “location, location, location.” But there are tons of truth to the old adage. Those investors with properties in the hottest market do better than those holding buildings in say Pawnee, Indiana. REIT Douglas Emmett (NYSE:DEI) certainly fits into the former camp.
DEI owns office and residential buildings in Southern California. We’re talking L.A. San Francisco, Santa Monica, Beverly Hills, etc. The key for Douglas Emmett is that this area of the country is in very very very high demand. And yet, space continues to be constrained. There simply isn’t any real room in Southern California to build new construction. This provides DEI with an amazing moat, strong rent growth — thanks to its short lease agreements — and high occupancy rates for its properties.
All of this has helped drive DEI’s dividends over the last decade or so.
The beauty is that Douglas Emmett has been using excess cash to replicate its model in another high barrier to entry market Honolulu and Hawaii. DEI has been on a buying spree lately, locking in top residential and office properties in the state. This provides it will another avenue for future FFO growth and dividend increases.
And yet, with a P/FFO that’s lower than the broader indexes covering REITs, investors are considering the potential at DEI.
Highwoods Properties, Inc. (HIW)
While New York and California get a lot of attention from investors looking at REITs, the south can be ignored. There are regions and corridors in the southern United States that garner higher incomes, high employment rates, and strong economic growth. Cheap REIT Highwoods Properties (NYSE:HIW) is one way to capitalize on these markets.
Raleigh, North Carolina- based HIW owns office buildings and plazas in such southern hotbeds of growth like Atlanta, Tampa, Orlando, Nashville, Memphis, Raleigh, and Richmond. It also owns a swath of assets in Pittsburgh — which continues to see an economic renaissance. This southern niche continues to help drive growth at HIW in both the cash flow and dividend department.
However, since the south is often ignored by other REITs, HIW has been able to take advantage of these top-tier cities stealth growth and has continued to beef up its development projects here. It currently has 8 development projects in its top three markets. Those buildings are already 93% leased. Right out the gate, Highwoods should be able to start making money on the projects.
And it’ll share the wealth as well. While the firm kept its payout static during and after the recession, it’s recently begun to increase the payout. After a one-time special dividend in 2016 to free itself of extra cash, the REIT has increased its payout by 12%.
All in all, HIW stock is a cheap way to buy into some of the hottest and secret markets in the country.
Mid-American Apartment Communities (MAA)
Apartment REITs have been some of the asset classes best performers since the recession. That’s included Mid-American Apartment Communities (NYSE:MAA). And yet, MAA is still cheap when compared to many of its apartment peers. That could be a huge opportunity for investors.
The opportunity comes from MAA’s strategy. Unlike many apartment REITs that have flocked to urban areas in top tier markets, MAA has continued to focus on suburban markets in the Sunbelt. This has continued to push MAA’s occupancy rates higher and help it score top renewal rates in the sector.
Secondly, Mid-American isn’t going for the super high end. The average rental price for its apartments is around $1,300 per month. This provides plenty of resiliency with regards to its tenants with regards to economic conditions. The combination of operating regions and market segment has allowed MAA to realize some strong growth over the last decade.
This has all translated into impressive total returns for shareholders. Over the last two decades, MAA has managed to produce 13.4% annualized total returns. That destroys the S&P 500 returns in that time frame. And much of that return has come from the firm’s commitment to increasing its dividend.
With a low P/FFO ratio, MAA could be one of the best buys in the apartment sector.
Disclosure: At the time of writing, Aaron Levitt held a position in AMZN.