Real estate investment trusts (REITs) have rallied sharply this year. On average, they have delivered a more than 25% total return so far this year. That means REITs aren't quite the bargain they were at the beginning of 2021.
However, there are a few attractive options out there for value-conscious investors. Three high-quality REITs that stand out as relative bargains this September are STAG Industrial (NYSE: STAG), Medical Properties Trust (NYSE: MPW), and Preferred Apartment Communities (NYSE: APTS).
A cheaper way to play this red-hot sector
STAG Industrial is an industrial REIT. However, unlike some peers, it takes a diversified approach by investing across the entire industrial real estate sector instead of focusing solely on logistics properties like warehouses. Because of that, investors haven't bid its share price to the moon like they have other industrial REITs.
For example, while its peers trade at an average funds from operations (FFO) multiple of 33.3 times, STAG sells at a deep discount at 20.5 times. That makes it a relative bargain, since it's benefiting from many of the same catalysts.
That was evident in the second quarter. STAG's core FFO per share grew 10.6%, driven by strong rent growth of 8.1% and new additions to the portfolio. It's seeing robust demand for its real estate, evidenced by an 80% retention rate for tenant leases expiring in the quarter and occupancy of 97.2%.
These factors gave STAG the confidence to boost its full-year FFO forecast. Meanwhile, since shares are so cheap, STAG offers a higher dividend yield of 3.4%, above the REIT sector's sub-3% average.
Trading at a healthy discount
Healthcare REIT Medical Properties Trust is growing at a brisk pace. The company has already secured more than $3.6 billion of new investments through the first half of the year, slightly more than the value of all the deals it closed during 2020.
The company's M&A strategy is creating significant value for shareholders. That's evident by a recent joint venture it signed, valuing an eight-hospital portfolio in Massachusetts at $1.78 billion. That's a remarkable 48% increase from the company's original investment in those facilities in 2016. In addition to confirming the value of its real estate, the deal provided the REIT with the cash to close new acquisitions.
These transactions have the company on track to generate between $1.81 to $1.85 of normalized FFO per share this year. That's 16.6% ahead of last year's total at the midpoint. Further, it implies that Medical Properties Trust trades at around 11.5 times its FFO, which is dirt cheap for a REIT, considering that many sell for more than 20 times FFO. Thanks to that lower valuation, Medical Properties offers a high dividend yield of 5.3%.
Preferred Apartment Communities is sharpening its focus on multifamily properties. The residential REIT sold its student housing and office properties over the past year. These sales have given it the cash to shore up its balance sheet, including repaying some preferred equity. That's increasing its financial flexibility to expand its multifamily portfolio in the Sun Belt region.
These moves are paying dividends as Preferred Apartment Communities is benefiting from strong apartment demand in the Southeast. That led the company to boost its core FFO guidance range to $0.90 to $1.00 a share. With the REIT's stock currently trading at less than $13 a share, it sells for around 13.5 times its FFO at the midpoint.
It's worth noting that the REIT is benefiting from some one-time items in 2021, including option termination revenues and a faster-than-expected repayment of real estate investment loans. However, it still trades at a cheap price compared to other Sun Belt-focused apartment REITs, many of which sell for more than 20 times their FFO. Further, Preferred Apartment Communities has significant long-term growth prospects as it uses its financial flexibility to expand its multifamily portfolio.
STAG Industrial, Medical Properties Trust, and Preferred Apartment Communities are high-quality REITs with solid growth prospects. Despite that, all three REITs trade at relatively low prices compared to other REITs. That makes them look like attractive buys for value-focused REIT investors this month.