The stock market has been in rally mode over the past few months. That has pushed up most stocks, making it seem like there are fewer compelling values.
However, some stocks are still on sale. Alexandria Real Estate Equities(NYSE: ARE), American Tower(NYSE: AMT), and Equity Residential(NYSE: EQR) stand out to a few Fool.com contributors because their share prices are still down. On top of that, they all have excellent track records of paying dividends. That makes them look like compelling investment opportunities right now.
This office REIT is not like the others -- and it's ready to rally
Marc Rapport (Alexandria Real Estate Equities): Office real estate has been particularly hard hit in the past couple of years as high inflation and rising interest rates piled on top of skepticism that demand for such space will ever return to its pre-pandemic levels.
Alexandria Real Estate Equities has been one of the casualties of this crunch, but this real estate investment trust (REIT) operates using a very different model from its sector peers.
The first REIT to focus entirely on life sciences and biotech companies, Alexandria is approaching its 30th year in business with a portfolio of about 30 office clusters occupied by 850 tenants -- including many of the brightest lights in big pharma, university-based research, and institutes -- in and around North Carolina's Research Triangle, Seattle, San Francisco, Boston, Washington, D.C., and the company's hometown of San Diego.
Much of the work in the world of life sciences involves things that simply can't be done from home, and Alexandria's properties remain largely full and growing. The company also is growing its payouts, with a record of 13 straight years of dividend increases that have the stock yielding about 4.2% at its recent share price in the neighborhood of $118.
Alexandria has missed the recent stock market rally. It's down by about 20% so far this year and is about 47% off its all-time closing high of $223.57 from Dec. 29, 2021. Yet the REIT has impressively beaten the benchmark Vanguard Real Estate ETF in both price and total return over the past 10 years, even with its recent swoon.
Will Alexandria's stock price rise from the ashes? That's up to the market, of course, and only time will tell. However, some analysts have recently upgraded it to a buy; its consensus target price of $166.43 predicts an upside of about 42% over the next year. I agree with that optimism and intend to regularly add to my stake in this life sciences landlord while it's still on sale.
A great dividend growth track record
Matt DiLallo (American Tower): Despite the rally in the stock market, shares of American Tower currently sit about 25% below their 52-week high. That has the data infrastructure REIT trading at a relatively cheap valuation and providing a tempting dividend yield. It trades at around 19 times its adjusted funds from operations (FFO), and its dividend at the current share price yields 3.4% -- near a historical high for the company.
American Tower has an excellent track record of growing its dividend. The company has increased its payout every year since it converted to a REIT over a decade ago, growing it at a more than 20% compound annual rate. While the payout growth has slowed in recent years, management anticipates another 10% boost in 2023.
Meanwhile, that payout is on rock-solid ground. American Tower expects to generate about $4.5 billion in cash flow this year. That's enough to cover its growing dividend ($3 billion) and growth in capital spending ($1.5 billion to build additional international cell towers and expand its U.S. data centers).
The company further backs its payout with a solid investment-grade balance sheet. While its leverage ratio of 5.2 times at the end of the first quarter was above its long-term target range of 3 to 5, leverage should improve in the coming years. Capital investments and organic tenant billings growth should increase earnings, which, combined with sales of noncore assets (it sold its Mexico fiber business in the first quarter for about $250 million), will help deleverage its balance sheet. That will put the company's dividend on an even firmer foundation, enabling it to continue increasing the payout in the future.
Equity Residential is benefiting from a tight housing market
Brent Nyitray (Equity Residential): Equity Residential is a real estate investment trust that specializes in luxury apartments in desirable urban areas. As of the end of March, the company owned or had a partial interest in 301 buildings in 10 urban areas, with 79,351 total units. The company focuses on urban areas that have tight labor markets, growing populations, and high demand for highly compensated knowledge workers. It has buildings in Southern California, Northern California, Boston, Seattle, and Washington, D.C., and is building its presence in Austin and Denver.
Most of Equity Residential's markets are characterized by extremely tight housing markets, where single-family starter homes are extremely expensive. Its tenants are high earners who are less likely to be impacted by inflation and are seeing strong wage growth. Occupancy at the end of March stood at 95.9%, which was almost back to pre-pandemic levels of 96.1%.
While home price appreciation nationally topped out in June 2022, rental inflation tends to lag home price appreciation by about 21 months. This means that Equity Residential will probably continue to see rising rents, especially as home price appreciation is picking up again.
Equity Residential recently upped its guidance for 2023 funds from operations (FFO) per share to come in between $3.69 and $3.79. At current levels, this gives the stock a price-to-FFO ratio of 18 times. The company has a dividend yield of 3.9%. Despite a lot of apartment construction in the pipeline, Equity Residential is competing more with new home construction, which is still tight in a lot of Equity Residential's markets. This will give the company pricing power going forward.
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Brent Nyitray, CFA has no position in any of the stocks mentioned. Marc Rapport has positions in Alexandria Real Estate Equities and Vanguard Specialized Funds-Vanguard Real Estate ETF. Matthew DiLallo has positions in American Tower. The Motley Fool has positions in and recommends Alexandria Real Estate Equities, American Tower, and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
