The last year has been brutal for much of the stock market. Rising interest rates and uncertain macroeconomic conditions were especially hard on real estate investment trusts (REITs). Since these atypical stocks rely heavily on debt to invest in real estate and real estate-related securities, interest-rate increases negatively impact their cost of borrowing.
The broader REIT index tracked by the National Association of Real Estate Investment Trusts (NAREIT) shows that publicly traded REITs are down 25% in the last 12 months. That's a much larger dip than the 11.6% drop the S&P 500 experienced over that same period.
While many real estate stocks are making a comeback, a few top REITs are still trading at relatively cheap prices when comparing valuations. These include Stag Industrial(NYSE: STAG), Apple Hospitality REIT(NYSE: APLE), and Federal Realty Investment Trust(NYSE: FRT). All three are trading at a price-to-funds from operations (FFO) ratio of 15 or less. This metric, which is the REIT equivalent of a price-to-earnings ratio, is much less than the S&P 500 average P/E of 20, indicating that their current prices are a steal.
Here's a closer look at each company, and at why three Motley Fool contributors believe they're no-brainer buys at today's pricing.
Stag stock has staggered but not been knocked out
Marc Rapport (Stag Industrial): Stag Industrial has a business model that positions its stock well for future growth in both share price and dividend payouts. The Boston-based REIT invests in industrial real estate, with a large, diverse tenant base engaged in e-commerce and other distribution logistics as well as manufacturing. The company's portfolio of 562 buildings in 41 states is about 99% occupied, as demand for this kind of space continues to be strong.
Stag Industrial stock has been hammered by the same inflationary pressures, interest-rate hikes, and other economic concerns that have affected the market for commercial real estate. But it's been showing signs of recovery in recent weeks. The chart below shows Stag's share-price movement year to date compared with that of the Vanguard Real Estate ETF, an exchange-traded fund (ETF) that generally holds about 160 REITs and serves as a good proxy for that sector.
As noted above, FFO is the standard measure of operating performance for a REIT; this makes the ratio of share price to FFO per share a good metric for comparing REITs. In this case, Stag stock is selling for a multiple of about 15, compared with 27 for industrial REIT giant Prologis, based on each company's FFO for 2022 and its current share price.
Stag stock also provides a nice current yield of about 4.5%, compared with about 3% for Prologis. Analysts give the smaller REIT a consensus target price of $37.83, which would be a nice bump from its current $33 or so a share.
Stag shareholders also get the benefit of monthly payouts instead of quarterly (current yield is 4%). This makes the stock a nice choice for passive income investors who'd like a steady stream of cash from a real estate stock that's currently selling at a bargain price.
Though beaten and bruised by the pandemic, Apple Hospitality is a bargain
Kristi Waterworth (Apple Hospitality REIT): There's no question that the COVID-19 pandemic has hit some sectors of the real estate industry hard, and perhaps none have seen as much devastation as those involved in hospitality. It's been really difficult to be a hospitality REIT over the last few years, and many are still in pretty bad shape, keeping investors on the sidelines as they wait to see what happens in the longer run.
I'm not waiting for those companies to decide if it's time to get back in the water, because I know there are hotel groups that will make it. One that I'm incredibly confident about is Apple Hospitality REIT.
The pandemic certainly threw it a curveball, but it's come out the other side more or less unscathed. As of the end of 2022, many of its most important metrics were near or exceeding 2019 levels. Net income, for example, was $144 million in 2022, versus 2019, when it was $171 million. In between, the REIT suffered a heavy net loss in 2020 of $173 million, but it's clearly made vast strides since.
In part, Apple Hospitality owes its return to profitability to the public's return to travel and pent-up demand for vacations, but that's not the whole story. The company is doing something right, and it's showing in a continued recovery in occupancy and room rates.
In 2019, Apple Hospitality's overall occupancy rate and average daily room rate were good, but 2020 was a terrible year. By 2021, those vital numbers were already rebounding dramatically, and 2022 saw even further gains.
| Metric | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|
Occupancy rate | 77% | 46.1% | 66.3% | 72.6% |
Daily room rate | $137.40 | $111.49 | $123.78 | $149.36 |
Data source: Apple Hospitality REIT's 2022 10-K filing. All figures are yearly averages.
All of this is fantastic news for Apple Hospitality REIT. It's even more impressive considering that it recovered so quickly without having to do any heavy borrowing or having to sell off any valuable properties. Its assets and liabilities are about the same as they were in 2019, with an asset-to-liability ratio of approximately 3-to-1.
Apple Hospitality REIT stock is trading for about $15 per share as of March 29, giving it a dividend yield above 6.5%. Its price is around 10 times its FFO, making it the cheapest of the three REITs mentioned here.
It's also one of the cheapest stocks in my portfolio with one of the best yields. As far as I'm concerned, it's one everyone should pick up right now while it's such a good buy. Interest in travel is coming back in a big way, and someone has to turn down all those beds at night. That might as well be Apple Hospitality REIT.
This top-tier retail stock is far from stressed
Liz Brumer-Smith (Federal Realty Investment Trust): Retail real estate may not sound like the safest or smartest investment in an economy that could be headed into recession. But Federal Realty Investment Trust isn't your average retail company. The REIT specializes in the development, ownership, and leasing of just over 100 high-end open-air shopping centers and mixed-use residential and office buildings in nine of the largest cities across the country. Its properties are strategically located in high-density suburban neighborhoods that serve middle- to higher-income families, who often feel less financial stress during recessionary periods.
The REIT has a diverse mix of tenants ranging from necessity-based services like grocery stores, banks, and pharmacies to more leisure-focused retail like restaurants, clothing stores, home decor, and fitness centers. This diversity is an advantage, helping it offset losses when a single retailer or industry is struggling.
This niche investment strategy has helped the company keep pace with and even outperform its retail REIT peers during the last two major market corrections (including the Great Recession):
SPG Total Return Level data by YCharts.
Right now 94.5% of its portfolio is leased; its full-year 2022 earnings indicate that the company is not only financially strong but growing rapidly. Its FFO rose by 13% last year and net income jumped by 49%. This rate of growth for a retail REIT is impressive in a healthy economy, but it is outstanding in today's challenging retail environment. As if this wasn't enough, Federal Realty Income Trust has a track record of 55 years of consecutive dividend increases.
The REIT's stock remains down 21% today, while its dividend yield is just under 5%. Trading at a price-to-FFO ratio of around 15, Federal Realty Investment Trust is a no-brainer dividend stock to buy at today's juicy pricing.
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Kristi Waterworth has positions in Apple Hospitality REIT and Stag Industrial. Liz Brumer-Smith has positions in Prologis and Stag Industrial. Marc Rapport has positions in Federal Realty Investment Trust, Prologis, and Stag Industrial. The Motley Fool has positions in and recommends Prologis and Stag Industrial. The Motley Fool has a disclosure policy.
