7 best value REITs for income investors

These value REITs are benefiting from a rebounding real estate sector – and offer attractive dividend yields to boot.

  • By Lisa Springer,
  • Kiplinger
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The real estate sector is staging a major comeback in 2021.

And this is great news for real estate investment trusts (REITs) – special tax-advantaged businesses that provide investors with exposure to real estate – which look particularly cheap right now following a pandemic-related decline in 2020. As such, it appears to be an opportune time for income investors seeking out value REITs.

There are several catalysts for the rebound in REITs, including an improving U.S. economy, continued low interest rates and the return of inflation. The Biden administration's plan to hike taxes could provide another REIT tailwind. His proposal currently calls for raising the corporate tax rate from 21% to 28% and the long-term capital gains tax rate for wealthier Americans from a top rate of 23.8% at present to as much as 43%.

Changes in tax laws may make REITs more attractive due to their structure as pass-through entities that are largely immune to the impact of rising tax rates.

Another characteristic unique to REITs is that the bulk of returns come from dividends, not capital gains. This is in contrast to growth stocks, which generate most of their returns from capital gains and are made less attractive as these taxes rise.

While REITs have emerged as one of the best-performing stock market sectors this year, not all REITs are alike. Some REIT sectors such as office and retail suffered through the loss of tenants and customers during the COVID-19 shutdown and are bouncing back as businesses reopen. Other REIT sectors such as industrial and data centers experienced minimal effects during the pandemic and are benefiting from trends that favor telecommuting and e-commerce.

As the sector continues to strengthen, it's getting a little harder to find value REITs these days. Many individual REIT stocks have soared and are trading near record valuations – but there are still options out there.

Here are seven value REITs flying under the radar of investors and priced at a discount to industry peers in 2021. Each boasts improving FFO per share (funds from operations, or FFO, is an important REIT earnings metric, generous dividends and solid fundamentals.

Data is as of July 13. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. REITs listed in reverse order of yield.

STORE Capital

  • Market value: $9.7 billion
  • Dividend yield: 4.0%

STORE Capital (STOR) specializes in single-tenant properties that it leases to middle-market corporate tenants from the service, retail and manufacturing sectors. The REIT owns 2,656 properties and has 522 tenants across 49 U.S. states. STOR's property portfolio boasts an occupancy rate of 99.6%.

Approximately 25% of STORE Capital's portfolio is leased to tenants like restaurants, health clubs, child care and movie theatres that suffered last year because of the pandemic. Rent collections have improved in 2021 as businesses have reopened and the REIT delivered a good March quarter with adjusted FFO per share up 4.3% from the year prior. STOR is guiding for 2021 adjusted FFO of $1.90 to $1.96 per share, up 5.6% from last year at the low end of the range.

STORE Capital has generated 4.2% annual FFO growth. In addition, STOR is one of the best value REITs in terms of delivering strong dividend growth – raising its payout an average of 6.4% annually since 2015 – and a better-covered dividend relative to its peers.

The REIT has identified nearly 200,000 small companies as potential tenants within its target markets and plans aggressive growth via acquisitions. STOR has $12.4 billion of real estate in its pipeline, a fortress-like balance sheet and well-laddered debt maturities that support its acquisition strategy.

STOR shares are valued at an 18-times multiple to forward adjusted FFO and at a 12.5% discount to similar REITs.

Physicians Realty Trust

  • Market value: $4.0 billion
  • Dividend yield: 4.9%

Physicians Realty Trust (DOC) invests in medical office properties leased to national and large regional health systems. The REIT focuses on outpatient facilities off-site from hospital campuses and owns 274 properties.

Its property portfolio is mainly leased to medical specialists like oncology and surgery centers that are not subject to telehealth risk. In addition, these outpatient facilities benefit from post-COVID trends favoring non-hospital settings over hospitals.

Physician Realty's portfolio is well-diversified across 31 states, with no one area representing more than 8% of leasable space and no one tenant accounting for more than 6% of annual rent. The REIT's growth comes mainly from acquisitions and the company has pre-funded its 2021 pipeline. Physicians Realty plans to invest $400 million to $600 million in property acquisitions during 2021.

The REIT has good liquidity to fund its acquisition strategy, with $694 million currently available on its credit line, an investment grade credit rating and no significant debt maturities before 2023.

The REIT's FFO per share improved nearly 4% during the March quarter, driven by better than 2% same-store income growth and an incremental contribution from acquisitions. Physicians Realty was able to collect 99.7% of March rents while keeping its portfolio 96% leased.

The shift of more healthcare services to outpatient settings and Centers for Medicare & Medicaid Services (CMS) projections that healthcare spending will rise 6% annually through 2028 could create tailwinds for this REIT. Consensus analyst estimates look for 4% FFO per share growth this year and next.

Physicians Realty pays a dividend of 92 cents per share that has held steady since 2018. Payout from FFO is 84% and within the normal range for a REIT. DOC shares are reasonably priced as far as value REITs go, trading at a 17 times multiple to forward adjusted FFO and a 9.5% discount to REIT competitors.

Baird analyst Amanda Sweitzer noted in May that medical office building REITs have underperformed other real estate investment trust sectors so far in 2021, but they remain attractive investment ideas due to their well-covered dividends, earnings growth and acquisitions. She has an Overweight rating on DOC shares, which is the equivalent of a Buy.

Whitestone REIT

  • Market value: $340.9 million
  • Dividend yield: 5.3%

Whitestone REIT (WSR) owns neighborhood shopping centers primarily in fast-growing areas of the Sunbelt. The REIT's portfolio consists of 58 properties and 5 million square feet of leasable space in or near major cities in Texas and Arizona, with expansion planned into Florida, Georgia and North Carolina.

Most of the company's approximately 1,400 tenants are in service-oriented businesses like restaurants, food service, grocery and medical/dental that have been unaffected by e-commerce trends harming other retail REITs.

The average lease term of the REIT's portfolio is four years and the occupancy rate is 89%. This is a lower rate than some retail REIT peers and leaves plenty of room for FFO growth by increasing occupancy rates and releasing space at higher rents. During the March quarter, Whitestone's average rental rate increased more than 2%.

Whitestone's core FFO per share declined by one penny in the first quarter of 2021, but new leases representing $19.9 million of annualized revenue were signed – which bodes well for future performance. The company plans to capitalize on the strengthening U.S. economy by re-activating its acquisitions and development strategy. Analysts look for the REIT's FFO to rise 2.2% in 2021, and accelerate to 6.3% in 2022.

WSR shares are valued at only a 10.5-times multiple to forward adjusted FFO and 50% discount to REIT industry peers. Some of the discount may be due to the REIT's small size and higher than average debt. However, Whitestone has a plan for reducing debt from 9 times EBITDA (earnings before interest, taxes, depreciation, and amortization) currently to 6 times to 7 times over the next two years. The value REIT also plans on trimming administrative expenses from 16.9% of revenues to 8% to 10%.

Whitestone has paid a monthly dividend consistently since 2010. During the pandemic, the REIT reduced its dividend, but returned to growth in early 2021 with a 2.4% dividend hike. Payout from core FFO is a relatively low 44%, which enhances dividend safety.

W.P. Carey

  • Market value: $13.9 billion
  • Dividend yield: 5.9%

W.P. Carey (WPC) is one of the largest diversified REITs investing in net lease commercial properties and has a presence in the U.S. and Europe. It owns 1,261 properties representing 146 million square feet of leasable space, mainly consisting of industrial, warehouse and self-storage, but also single-tenant retail and office properties.

The company has 351 tenants, with the top 10 representing approximately 21% of the portfolio. Its facilities are 98.3% occupied and contractual rent increases are built into 99% of leases, including 61% linked to the consumer price index.

W.P. Carey focuses on acquiring mission-critical assets (such as warehouses) that are essential to the operations of its tenants and grows profits through rent escalations, credit improvements and rising real estate values. Thanks to the essential nature of its facilities, the REIT's occupancy rate remained at over 98% during the pandemic.

Over $3 billion worth of properties have been acquired since 2018 and W.P. Carey has $311 million of development projects planned for 2021. WPC's investment grade balance sheet, with no significant debt maturities before 2024, provides plenty of flexibility for expanding its portfolio.

Among value REITs, this one is reliable when it comes to dividend growth. W.P. Carey has increased its dividend every year since going public in 1998, and has averaged an annual dividend growth rate of roughly 4% in that time.

Despite high-quality properties, a solid balance sheet and reliable rising dividends, WPC shares are valued at just 16 times forward adjusted FFO and a 25% discount to peers. J.P. Morgan Securities analyst Anthony Paolone recognized this value gap in June and upgraded his rating on WPC shares to Overweight (Buy).

Iron Mountain

  • Market value: $12.8 billion
  • Dividend yield: 5.6%

Iron Mountain (IRM) is an industry leader in physical record storage, which includes not only paper documents but also art, antiquities and other high-value items.

The REIT serves around 225,000 customers worldwide and has no major competitors in the physical storage business. The average customer has stored records with Iron Mountain for 15 years and it enjoys a 98% customer retention rate.

Iron Mountain expanded into digital record storage approximately three years ago and quickly grew that business to 10% of total storage revenue. Construction projects are underway that will increase the REIT's digital storage capacity by nearly 40% and Iron Mountain could potentially triple the storage capacity from its existing data center portfolio.

Another initiative, Project Summit, is designed to capitalize on the REIT's ability to offer physical and data storage under the same roof and targets $375 million of annual run rate cost savings over the next two years.

Iron Mountain delivered a solid March quarter consisting of record quarterly revenues and a 2.1% year-over-year gain in adjusted FFO. The REIT is guiding for 7% to 12% adjusted FFO per share growth this year.

This is another one of the value REITs on this list that has steady dividend growth. The company's dividends have increased seven years in a row. Over the past five years, IRM has averaged a 5.1% annual dividend growth rate. The REIT maintains a dividend payout from adjusted FFO in a low to mid-60s range and a long-term target leverage ratio at a conservative 4.5 times to 5.5 times EBITDA.

IRM shares trade at a 13-times multiple to forward adjusted FFO and a 39% discount to REIT peers.

Bluerock Residential Growth REIT

  • Market value: $314.7 million
  • Dividend yield: 6.1%

Another small REIT paying generous dividends is Bluerock Residential Growth REIT (BRG). This REIT invests in high-quality apartment communities across the Sunbelt states. Bluerock owns approximately 17,000 apartments and adds value to its properties via renovations and implementing Smart Home technology.

The REIT has generated 24% returns on the 3,027 apartment renovations completed so far, and plans upgrades to another 4,349 units, targeting returns of 20% to 25%.

During the March quarter, Bluerock's occupancy rate rose 150 basis points from the year prior to 95.8%. Additionally, the REIT collected 97% of rents and its average lease rate grew 3.5%. Analysts are forecasting 2021 FFO of 69 cents per share, which is expected to rise 80 cents per share in 2022.

Bluerock pays an annual dividend of 65 cents per share that has held steady since 2018 and is more than covered by FFO. The REIT demonstrated its resiliency by maintaining its dividend during the pandemic.

BRG holds $260 million of cash, has reasonable debt at 51% of capitalization and has no significant near-term debt maturities.

Shares of BRG are valued at 17 times forward adjusted FFO and a 20% discount to industry peers. Some of the discount may be because of preferred stock in the REIT's capital structure, but the higher-cost preferred shares are redeemable over the next few years, enabling Bluerock to eliminate much of its preferred dividend costs.

Omega Healthcare Investors

  • Market value: $8.7 billion
  • Dividend yield: 7.3%

Another one of the value REITs trading at a discount to peers is Omega Healthcare Investors (OHI). Omega is the largest REIT focused on skilled nursing facilities. It owns 954 properties across the U.S. and the U.K., representing nearly 97,000 patient beds and a portfolio net asset value of $10.2 billion as of March 31.

This REIT was hit hard by COVID-19 as it saw nursing home occupancy rates fall 11% from January 2020 to January 2021. OHI is on the road to recovery, though, with occupancy rates improving 3% in the first five months of this year. In addition, Omega was able to collect 99% of rents during the March quarter.

Skilled nursing is an attractive healthcare niche since these facilities are reliably funded through Medicare and Medicaid, providing a low-cost alternative for post-acute care. They also take in nearly 21% of hospital discharge patients, more than home healthcare or any other facility type. Among skilled nursing facility operators, Omega Healthcare stands out because of its safe triple net leases and large, diversified tenant base.

OHI has delivered nearly 9% annualized FFO growth since 2004 and 17 consecutive years of dividend hikes, including an 11% average annual increase over the past five years. Despite its position as the largest skilled nursing operator, Omega has tapped only 5% of its potential market and the REIT expects to double in size over the next 10 years via a combination of acquisitions and development.

This high-quality REIT receives top rankings from UBS strategist Keith Parker, who named OHI among his favorite real estate picks in June. OHI shares are priced at a 12-times multiple to forward adjusted FFO and a 45% discount to industry peers.

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