REITs are down bad this year. REIT stocks across nearly all sectors are down by double digits since January. The worst-performing sector, infrastructure, is down 24.6%. At the same time, the “best” performer among 13 categories (healthcare REITs) is up a measly 3%. Compare that paltry performance to the S&P 500, which remains up almost 15% since January despite recent losses.
Clearly, REITs as a collective group are suffering most from credit crunches and higher rates. Couple that marketwide struggle with industry-specific risks like reduced leasing interest and falling property values, and it’s clear why many REITs are having a tough time adapting to today’s economy.
But the news isn’t all bad. Although you should likely avoid commercial real estate and many residentials, some REITs dragged down alongside the rest represent a great buying opportunity. These undervalued REITs generate passive income through yields competitive with fixed-income investments. At the same time, their pricing beatdown is likely an overcorrection, providing upside opportunities at today’s entry points.
If you’re worried about a housing crisis or shielding your portfolio from risky real estate, these seven undervalued REITs are perfect cornerstones for a well-rounded portfolio.
Park Hotels & Resorts (PK)
Park Hotels & Resorts (NYSE:PK) operates more than 26,000 rooms across 41 upper-end hotels across the United States. While luxury hotels may seem a strange play in today’s economy, PARK is positioned to maximize that market’s potential.
You may remember that, in 2017, PARK spun off from Hilton Worldwide Holdings (NYSE:HLT). Hilton and PARK’s managerial team intended for the move to serve as a forcing function that let PARK focus on a specific, upper-end market while eschewing lower-end hotels that drained time and resources from their core mission. Narrowing your operational focus is nearly always the best management strategy and were it not for the pandemic and subsequent economic turmoil, PARK’s divestiture may have paid off handsomely by now.
But the hospitality sector is rebounding. Last year, national occupancy rates climbed closer to 2019, reaching 62.7%. Analysts expect that stat to climb further by 2023 despite economic tightening. At the same time, the average daily rate exploded in 2022. The new high is due, of course, partly to inflation. But more occupants paying higher rates is a series of stats that will pay off for PARK as we enter the holiday season.
Macerich (NYSE:MAC) is another apparent contrarian in the world of undervalued REITs. The company owns and operates Class A malls. Although malls as a broad category are undeniably in the middle of a downswing, Class A malls tend to outperform. These malls often maintain decent foot traffic, steady revenue, and long-term leasing. To envision a Class A mall, picture a destination mall — somewhere you go to visit and spend a day, rather than a physical location you run into for a quick item that could be bought online.
Like PARK, Macerich is on a steady path toward streamlining its business interests. Since 2010, Macherich has reacted to online selling growth by cutting out less profitable stores and low-quality assets to focus on the high-end malls that matter most. And, like PARK, the pandemic did a number of MAC’s bottom line. But even that is rebounding as we head into the holiday sales season. Mall visitation and foot traffic is exploding across the board. As Class A malls reinvent themselves to serve as coffee shop destinations, co-working spaces, and more, MAC is an undervalued REIT positioned to capture upside from an adaptive industry.
American Tower (AMT)
American Tower (NYSE:AMT) is a globally diversified cell tower company that owns and operates more than 225,000 towers. It goes without saying that cell service is a necessary utility, making this undervalued REIT a staple in today’s market. To that end, these distinct properties are likely to remain resilient, even in the face of broader fluctuations in the real estate market.
Cell tower functionality and presence will only grow as the “Internet of Things” continues to connect an increasing number of consumer devices. This bodes exceptionally well for AMT’s future, cementing its position as a top undervalued REIT today. Beyond pure functionality, American Tower’s geographic diversity is a notable strength. The company effectively operates towers in developed nations like the United States and manages towers in emerging markets such as Africa. With the world’s growing digital connectivity, these emerging markets offer a promising avenue for substantial growth.
As with all REITs, AMT’s dividend is appealing to income investors is the enticing dividend it offers to investors. However, American Tower’s consistent track record of increasing its dividend over the past 20 distribution cycles sets it apart. This remarkable reliability underscores the company’s resilience and its capability to weather economic storms, making it a strong and secure investment choice.
Realty Income (O)
Income-focused investors hunting for undervalued REITs should first look to Realty Income (NYSE:O). Realty Income is called the “monthly dividend company” for a reason. O’s current yield stands at 5.57% and it’s monthly distribution hovers around $0.25 per share — not bad considering high fixed-income investment rates today.
Realty Income offers a suite of sustainable businesses within its leasing portfolio for investors shying away from residential REITs or riskier luxury properties. Customers include consumer staples like FedEx (NYSE:FDX), CVS Health (NYSE:CVS), and Lowe’s (NYSE:LOW). Companies like these are steady even amid economic turbulence, and Realty Income is an ideal opportunity to capture real estate upside while protecting against economic cycle downswings.
Ventas (NYSE:VTR) is a healthcare REIT, notable since — as we mentioned above — healthcare is the only sector generating positive REIT returns this year. Yet Ventas remains undervalued today, with Morningstar pegging the stock 40% below its fair price. Furthermore, Ventas’ properties, spanning 1,400 locations, target a key segment in a growing healthcare economy. Its primary customer base includes senior housing, among other segments. The 80+ healthcare segment is poised to grow by nearly 80% by 2030 and by 2050, those patients will need three caregivers for every senior receiving care. A growth trajectory like that is enough to cement Ventas’ position as an undervalued healthcare REIT today, but this stock has more upside.
Per Morningstar, this healthcare REIT “stands to disproportionately benefit from the Affordable Care Act” due to “an increased focus on higher-quality care in lower-cost settings.” As healthcare legislation stands among Americans’ top priorities, shifting emphasis to that value proposition makes Ventas an ideal healthcare REIT play for tomorrow’s economy.
Iron Mountain (IRM)
Iron Mountain (NYSE:IRM) is a dual threat — it’s a physical security-based REIT that also serves on the periphery of artificial intelligence and machine learning stocks.
IRM has already established itself as a significant player in the realm of extensive data center and cloud solutions. It boasts a clientele that includes over 90% of Fortune 1000 companies entrusted with storing a wide array of information, including historical documents such as photographs, contractual agreements and audio recordings. However, what truly beckons to investors is the surging demand for increased data processing and storage capacity.
Iron Mountain’s cutting-edge subterranean and above-ground data centers are equipped to cater to a diverse range of clients, ensuring efficiency, uninterrupted uptime and unwavering reliability for both conventional computing operations and machine learning endeavors. In the context of machine learning, it’s not just the ample space, size and capacity that matter; it’s also the stringent security measures surrounding proprietary data.
Equinix (NASDAQ:EQIX) shares similarities with American Tower, but instead, it specializes in data center ownership and management. Equinix’s extensive portfolio comprises ownership and leasing rights to more than 240 data centers across regions, including the Americas, Europe, the Middle East and the Asia-Pacific markets.
Notably, Equinix has forged strategic partnerships with major players in the realm of cloud computing and digital technology. With a prestigious client roster featuring industry giants like Cisco (NASDAQ:CSCO), Oracle (NYSE:ORCL), Amazon (NASDAQ:AMZN) and others, Equinix’s services are so integral to these corporate operations that it possesses the resilience to weather economic downturns effectively. The company’s recent Investor Day materials further underscore its position as a stalwart within the industry.
Company executives proudly highlight Equinix’s rapid growth rate, deep market penetration, and its ability to adapt to the often turbulent macroeconomic landscape. If the management’s vision holds true, Equinix is primed to sustain its impressive growth trajectory. Moreover, the company may experience a snowball effect as more businesses embrace cloud computing and embark on large-scale digitization initiatives. All in all, it firmly establishes itself as a reliable choice among Real Estate Investment Trusts (REITs) for market stability.
Equinix’s trailing twelve-month dividend stands at a substantial $3.41 per share. While the share price may appear steep to some investors who cannot take advantage of fractional investing platforms, it’s worth noting that Equinix’s stable dividend payments and reasonable payout ratio set it apart from its REIT peers.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.