Today I am looking at some of the best undervalued REITs (real estate investment trusts) that have serious profit potential. These stocks are either at a trough price-wise, or their valuation metrics are very cheap.
For example, many of these REITs are down over 25% year to date. Moreover, their valuation metrics show that their price to funds from operation (FFO) are at low multiples.
Moreover, in most cases, their dividend yields are also high — many of them higher than their average historical yields. This can be seen in the chart below, which shows the average P/FFO and the average yield of each REIT.
It shows that the average P/FFO of the group is just 8.22x for 2022. It is lower for 2023 at 7.8x. The average dividend yield of the group is 10%.
Moreover, the median target price upside is over 17% higher. That shows how much these undervalued REITs could rise over the next year if interest rates eventually peak and then start to decline.
Now, let’s dive in and look at these REITs.
| GNL | Global Net Lease | $15.07 |
| MDRR | Medalist Diversified REIT | $0.88 |
| OHI | Omega Healthcare Investors | $30.98 |
| OPI | Office Properties Income Trust | $19.88 |
| RTL | The Necessity Retail REIT | $7.73 |
| BDN | Brandywine Realty Trust | $9.53 |
Global Net Lease (GNL)
Yield: 10.7%
Global Net Lease (NYSE:GNL) is the first of our undervalued REITs. It’ a REIT that is focused on sale-leaseback transactions. This is where the tenant formerly owned the property and then sells it to Global Net Lease and immediately leases it back from GNL.
This is a win-win for both parties — the company that formerly owned it gets cash, and GNL gets a captive lessor for the property. They usually have a great desire to stay there for a long time.
As a result, GNL now pays an annual dividend of $1.60 per share, which gives the REIT a dividend yield of 10.7%. Moreover, analysts estimate that its funds from operation (or FFO), a measure of cash flow, will reach $1.67 this year and $1.70 by the end of 2023. That puts the stock on a very reasonable price-to-FFO (P/FFO) of just 9x this year and 8.8x next year.
Moreover, in the past four years, its average yield was 10.53%. This is slightly lower than its present 10.7% yield. That implies that the stock could rise 1.5% if it were to achieve the historic yield.
Medalist Diversified REIT (MDRR)
Yield: 10.1%
Medalist Diversified REIT (NASDAQ:MDRR) is REIT that invests in apartment buildings and hotels focused in southeast states including Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama.
The stock is very cheap in that it has a 10.1% annual dividend yield, given its 8-cent annual dividend payment rate. Moreover, the stock is not too expensive at 11.3 P/FFO for 2022.
TipRanks reports that analysts have an average price target of $2.25 for the stock, which is over twice Monday’s closing price.
Omega Healthcare Investors (OHI)
Yield: 8.7%
Omega Healthcare Investors (NYSE:OHI) is focused on the long-term healthcare industry. It invests in skilled nursing and assisted living facilities.
The stock is cheap with a dividend yield of 8.7%. This is well below its four-year average yield of 7.93%. That implies that if it reaches this yield, the price will rise 10.1% from here to $33.80. That is because if you divide its present annual dividend of $2.68 by 7.93%, the result is a price of $33.80.
Moreover, OHI stock has an inexpensive P/FFO metric of just 10.4x for 2022 and 10.1x for 2023. This is because analysts forecast its FFO will rise 3.1% next year to $3.03 per share from $2.94 forecast for this year.
Office Properties Income Trust (OPI)
Yield: 11.2%
Office Properties Income Trust (NASDAQ:OPI) is a REIT that likes to focus on government buildings. The REIT is managed by The RMR Group (NASDAQ:RMR).
The stock is cheap with an 11.2% dividend yield and trades with a yield slightly higher than its four-year average of 11.1%.
Moreover, the P/FFO is inexpensive at just 4.2x analysts’ forecast of FFO of $4.70 per share for 2022. And for 2023, with analyst projections of $4.75 per share, OPI stock is at just 4.1x its FFO projections.
Another way you know this stock is cheap is that its price-to-sales ratio is just 1.69x sales, according to Seeking Alpha.
The Necessity Retail REIT (RTL)
Yield: 11.1%
The Necessity Retail REIT (NASDAQ:RTL) is, as its name implies, an REIT focused on retail and distribution-related commercial real estate.
The stock has an attractive 11.1% dividend yield, which is well over its historical dividend yield. For example, in the last four years, its average yield has been 8.94%, according to Seeking Alpha. This is likely because investors are worried about a possible recession.
However, that provides a tether to upside value. For example, if the stock were to now have an 8.94%, given its annual dividend payment of 85 cents, the price would rise to $9.51 per share. That implies a potential upside of almost 25%.
Moreover, the stock is cheap based on analysts’ forecasts of $1.02 in FFO this year and 7.8% higher FFO at $1.10 next year. That puts it on a forward P/FFO of just 7.5x for this year and 7x next year.
Brandywine Realty Trust (BDN)
Yield: 8.07%
Brandywine Realty Trust (NYSE:BDN), the last of today’s undervalued REITs, is a large company with properties in the Philadelphia, Austin and Washington, D.C. markets. It has a 25-year track record of strength and is very profitable.
Right now the REIT has an 8% dividend yield, well over its historical average of 5.83% in the last four years. So if it had the same yield today, given its annual 76-cent dividend, the price would be over 38% higher at $13.06 per share.
Moreover, its FFO is expected to grow from $1.38 per share this year to $1.41 next year. That puts it on a cheap P/FFO multiple of just 6.8x FFO cash flow this year and 6.7x for next year. This is well below the average 8.2x P/FFO of this list of undervalued REITs.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.