Real estate is the worst-performing sector, down over 5% year-to-date (YTD). Due to higher for longer rates, there has been a broad-based selloff. Investors are throwing out the baby with the bath water. And now, there are some cheap REITs to buy.
The major issue for REITs has been the rise of the work-from-home phenomenon, which has increased vacancy rates. Besides, higher interest rates pose financing challenges, which has been a headwind. However, BMO Capital thinks REITs are oversold and investors should buy the dip.
Today, REITs are a contrarian pay for several reasons. First, quality REITs have strong balance sheets and no problem accessing capital. Furthermore, the sector is not monolithic. Self-storage, cell tower, industrial, residential, healthcare and industrial REITs are segments with good prospects. Even in the challenged commercial REIT universe, markets like New York have rebounded strongly as more companies mandate some time at the office.
The following cheap REITs to buy have suffered due to indiscriminate selling, but their fundamentals have never been stronger. Take advantage of the fear and buy these REITs.
Simon Property Group (SPG)
Simon Property Group (NYSE:SPG) is the largest mall REIT in the U.S. It has differentiated itself from competition by assembling a portfolio of high-quality community centers, retail malls and outlets.
The fundamental outlook for high-quality mall space is favorable, which makes Simon Property one of the cheap REITs to buy. Most retailers are seeking more mall space to meet their growth needs in the coming years. This comes from the realization that physical stores complement e-commerce sales and form the basis of a robust omnichannel strategy.
Although its occupancy levels fell to 90% in 2020 due to the pandemic, they have quickly rebounded. In Q1 of 2024 results, Simon Property revealed that occupancy was 95.5% on March 31. This highlights the demand for the Class A regional malls and premium outlets it offers.
Furthermore, the results showed that funds from operations (FFO) increased from $1.026 billion in Q1 of 2023 to $1.334 billion, or $3.56 per diluted share. Management estimates $12.75 to $12.90 in FFO per diluted share. Thus, SPG stock is one of the cheap REITs to buy at 12 times forward FFO.
Lastly, regarding financial stability, Simon Property is in excellent shape. With $3.1 billion of cash and $11.2 billion in liquidity, it has the cash to grow and meet its obligations.
Park Hotels & Resorts (PK)
One way to participate in the ongoing recovery in business travel is Park Hotels & Resorts (NYSE:PK). The owner of 43 premium-branded hotels offering 26,000 rooms in the U.S. presents a compelling opportunity given its high single-digit dividend yield, modest valuation and growth drivers.
Indeed, PK stock is one of the best cheap REITs to buy based on valuation alone. As of this writing, it trades at a forward price to FFO of only 7. What’s more, it pays a very attractive quarterly dividend and currently yields over 9%.
Besides the cheap valuation, there are other reasons to be optimistic about this REIT. First, business travel is booming. Secondly, it has a huge presence in the Hawaiian market, a major destination for Japanese tourists. According to the Hawai‘i Tourism Authority, in 2023 Japan tourists were 572,979 compared to 1,576,205 in 2019. With visitors 63% below pre-pandemic levels, there could be significant demand going forward as Japan travelers rebound.
Furthermore, it has just completed major renovations that will boost cash flows going forward. The Hawaiian market represents a third of cashflow and as this market recovers to pre-Covid19 levels, expect PK stock to soar. And if anything, you are paying a bargain single-digit multiple today.
Ventas (VTR)
This healthcare REIT has one major tailwind: baby boomers are entering their senior years. As a result, there will be soaring demand for high-quality medical care facilities. This means higher demand for its portfolio of senior housing, life science, medical office and hospital facilities.
Ventas (NYSE:VTR) is one of the most diversified healthcare REITs with over 1,400 healthcare-related properties in the U.S., U.K. and Canada. It categorizes its broad portfolio into senior housing, outpatient medical & research, and triple-net. The largest segment is senior housing, which accounts for about 40% of net operating income.
Indeed, the healthcare REIT is well positioned to benefit from the demand for senior housing from the baby boomer generation. It rents properties to senior housing operators like Holiday Retirement and Brookdale Senior Living (NYSE:BKD). Typically, it rents its facilities on long-term contracts that have annual rent escalators. Thus, it’s able to drive higher operating income growth.
While investors have been wary of REITs due to balance sheet problems from high interest rates, Ventas is safe. It has an investment-grade balance sheet and a manageable 2024 net debt/EBITDA of 7. At 15 times forward FFO, Ventas is one of the cheap REITs to buy today.
On the date of publication, Charles Munyi 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.