After a down year in 2020, real estate investment trusts (REITs) have bounced back in 2021. Overall, the average REIT had generated a more than 17% total return through the end of April. Because of that, REITs aren't the bargain they were at the start of this year.
However, despite that rally, several REITs still trade at cheap prices. Three that stand out as bargain buys this June for investors are Cousins Properties (NYSE: CUZ), Preferred Apartment Communities (NYSE: APTS), and STAG Industrial (NYSE: STAG).
An attractively priced way to play this fast-growing trend
Cousins Properties is an office REIT focused on fast-growing Sun Belt markets like Atlanta, Austin, and Charlotte. However, its stock price has declined by about 9% since the start of 2020. That's due to some concerns about the pandemic's long-term impact on office space. Because of that, it trades at a fairly cheap price of 13.5 times its 2021 FFO. For comparisons' sake, leading office REIT Alexandria Real Estate Equities (NYSE: ARE) trades at about 23 times its FFO.
While Alexandria's focus on the fast-growing life science sector is a big driver of its premium valuation, I think investors are underestimating Cousins' growth potential. While the pandemic has hurt demand for office space in high-cost coastal gateway cities, it's accelerated the Sun Belt migration trend. Because of that, Cousins is benefiting from strong demand for office space.
That was evident in the first quarter. Cousins executed 271,126 square feet of office leases during the period, with rental rates on second-generation contracts increasing 10.5% on a cash basis. Further, given the growing demand for office space in Austin, the company expects to start construction on Domain 9 in the second quarter. The company expects to invest $147 million to build the 335,000-square-foot office property.
The dual growth drivers from rising rental rates and development projects make this office REIT look dirt cheap these days.
An affordable way to play this red-hot trend
Preferred Apartment Communities is a residential REIT focused on owning apartment communities in fast-growing cities in the Sun Belt region. The company also has a complementary portfolio of grocery-anchored shopping centers and a few office buildings.
However, it's exiting the office sector, continuing the simplification strategy that saw it sell off its student housing portfolio last year. This portfolio shift, along with some pandemic-related headwinds, have weighed on the company's stock price.
Since the start of 2020, shares of Preferred Apartment Communities have lost more than a quarter of their value. That has the REIT trading at an attractive 12.5 times FFO. That's quite a bit cheaper than rival Sun Belt-focused apartment REIT Mid-America Apartment Communities (NYSE: MAA), which currently trades at 24.7 times its FFO.
While the REIT is currently facing some headwinds, its simplification strategy could be a big winner over the long term. Preferred Apartments is using the cash from selling its office and student housing portfolio to invest in new multifamily communities in fast-growing Sun Belt markets. It's also redeeming the high-cost preferred equity used to finance its expansion in the past. Because of that, it looks like a low-cost way to play this red-hot trend.
A cheaper way to invest in this megatrend
STAG Industrial's stock has performed relatively well during the pandemic, rising more than 14% since the start of 2020. One factor driving its growth is its focus on the red-hot industrial real estate sector. Those properties are benefitting from dual pandemic-related tailwinds driving increasing demand for logistics properties like warehouses.
However, unlike most other industrial REITs, STAG Industrial isn't a pure-play on logistics properties. Instead, it invests across the entire U.S. industrial sector, including warehouses, light manufacturing buildings, and flex/office space.
That diversification has weighed on the REIT's value relative to its peers. STAG currently trades at about 18.4 times its FFO, well below the 30.9 times FFO multiple of its industrial peers. Because of that, it's a cheaper way to invest in the industrial real estate megatrend.
Cheaper ways to invest in these exciting trends
Investors are putting premium values on REITs focused on fast-growing trends, like Sun Belt migration and e-commerce. However, they're overlooking some key players in Cousins Properties, Preferred Apartment Communities, and STAG Industrial. Because of that, bargain-hunting investors can get into those exciting trends at a much cheaper valuation by purchasing one of those REITs this June.