Real estate investment trusts (REITs) have been among the best-performing investments this year. Through the end of June, REITs have produced a more than 21% total return, coming up ahead of the S&P 500's nearly 16% total return.
However, several REITs still trade at attractive valuations despite that run, especially compared to their peer group. Three that stand out as compelling options for value-conscious investors this month are CyrusOne (NYSE: CONE), Duke Realty (NYSE: DRE), and Medical Properties Trust (NYSE: MPW).
An inexpensive way to play the data infrastructure megatrend
Data is growing at a phenomenal rate. According to a forecast by IDC, data usage is on track to grow at a 24% compound annual growth rate through 2025. That's driving the need for new data infrastructure like data centers.
Given the growth ahead for the data storage market, most data center REITs trade at a premium valuation. Overall, the average one sells at about 25 times its price to normalized FFO per share for 2021. That's pretty expensive when most other REITs typically trade at a mid-teens multiple of their FFO.
However, CyrusOne only trades at 20.2 times its FFO, making it significantly cheaper than its peers. While the company faces some near-term headwinds as existing leases expire and roll down to lower current market rates, the company will more than offset that headwind by expanding its data center portfolio. That should enable it to continue growing its FFO at a mid-single-digit annual pace over the next few years. Meanwhile, it has upside to higher rates as they rebound in the future. In the meantime, value-focused investors can get a great deal on CyrusOne, given its relatively cheaper valuation.
Same concept, different megatrend
Demand for warehouse space is also growing at a brisk pace, driven by the accelerating adoption of e-commerce. According to an estimate by CBRE, the U.S. will need to add 330 million square feet of new warehouse space by 2025 to support online order fulfillment. Because of that, industrial REITs are benefiting from high occupancy levels and fast-rising rental rates while the industry builds out additional capacity.
Those demand drivers have most warehouse-focused industrial REITs trading at premium prices. The sector's top six REITs trade at 32 to 49 times their AFFO, 27 to 40 times FFO, and a 10% to 28% premium to their net asset value (NAV).
However, Duke Realty stands out because it's one of the cheapest in its peer group. It has the lowest AFFO multiple at 32, the second-lowest FFO multiple at 28, and the second-lowest premium to its NAV at 11%. That relatively cheaper valuation comes even though Duke has a top-notch balance sheet and boasts a top-tier FFO and AFFO growth outlook. That peer-leading growth profile for a relatively lower price makes Duke stand out as a compelling way to play the growth in e-commerce.
A fast-growing REIT for a dirt-cheap price
Hospital-focused healthcare REIT Medical Properties Trust is more of a traditional value play. The company missed this year's REIT rebound, as its shares are down 5.7%. That's despite growing its normalized FFO per share 21% in 2020 and by 13% during the first quarter. Because of that, it has gotten much cheaper.
Thanks to a multibillion-dollar shopping spree last year, Medical Properties Trust expects FFO to rise to between $1.72 and $1.76 a share this year. That's likely conservative since the company has acquired even more hospital-related real estate over the past few months. With a stock price currently down to around $20.25 a share, Medical Properties trades at about 11.6 times its FFO. That's an absurdly low price for a REIT growing its FFO per share at a double-digit annual rate.
Great options for value hunters
Valuation is relative. What may look expensive to some investors is reasonably cheap when put into another context. That's certainly the case for CyrusOne and Duke Realty, which, while pricey compared to other REITs, are inexpensive versus their peers, making them compelling ways to play two fast-growing megatrends. Meanwhile, Medical Properties is just plain cheap, especially given how fast it's growing. Because these fast-growing REITs trade at relatively lower valuations, they could produce strong total returns. That makes them stand out as compelling options for value-focused investors this month.