Real estate investment trusts (REITs) struggled last year. The average one produced a total return of about -5%, with many producing much lower results. While the sector is off to a better start in 2021 (the average REIT's total return is nearly 3%), last year's selloff has many trading at cheap valuations.
Three REITs that currently stand out as great value buys right now for real estate investors are SL Green Realty (NYSE: SLG), Medical Properties Trust (NYSE: MPW), and W.P. Carey (NYSE: WPC).
Doing something about its low value
Shares of office REIT SL Green Realty are down about 20% since the beginning of 2020. Weighing on Manhattan's largest office landlord is the outsized impact the pandemic has had on the Big Apple. That hit SL Green's results, as its FFO declined from $605.7 in 2019 to $562.7 million last year. However, FFO was up year over year on a per-share basis, rising from $7.00 to $7.11 thanks to its share buyback program.
SL Green expects its FFO to decline in 2021 to between $6.30 and $6.70 a share, weighed down by asset sales and some lingering pandemic-related headwinds. However, with SL Green's stock price recently around $75, the office REIT trades at just 11.5 times its 2021 FFO at the midpoint. That's cheap for a REIT and why SL Green's dividend yield is almost 5% while the REIT sector's average is below 4%. The low valuation led the company to sell assets, giving it the cash to buy back its cheap shares.
Growing cheaper by the year
Shares of healthcare REIT Medical Properties Trust are up about 2% since the start of last year. While that's a better performance than many other REITs, the stock has gotten much cheaper despite the move higher. That's because the REIT grew its normalized FFO per share by 21% last year and expects it to rise by another 11% to a range of $1.72-$1.76 per share in 2021. Driving that growth is the nearly $3.6 billion of new investments it closed in 2020 and the $1.1 billion of new deals it has secured so far in 2021.
With shares of Medical Properties Trust recently trading at around $21.50 apiece, it sells for about 12.5 times its FFO. Because of that low valuation, the REIT also boasts having an above-average dividend that currently yields more than 5%.
Cheap given its portfolio forecast
Diversified REIT W.P. Carey's stock price is down about 15% since the start of 2020. That slump came even though the REIT delivered solid results in the face of a global pandemic. While its adjusted FFO per share slipped 5.2% due to some pandemic-related headwinds, it enjoyed a strong rental collection rate compared to other REITs. Further, it took advantage of market conditions to make $825.9 million of new investments last year.
The REIT expects its results to improve in 2021. It anticipates generating between $4.79 and $4.93 per share of AFFO, driven in part by an anticipated $1 billion to $1.5 billion of new investments.
With its stock currently fetching around $68.50 a share, it trades at about 14 times the midpoint of its 2021 AFFO forecast. That's pretty cheap, especially given its portfolio concentration. Currently, 47% of its portfolio is warehouses and industrial real estate. That's worth noting, considering that many industrial REITs fetch premium valuations these days of more than 20 times their FFO. One benefit of W.P. Carey's relative cheapness is that it offers a higher dividend yield, currently over 6%.
Cheap prices = high dividend yields
SL Green, Medical Properties, and W.P. Carey all trade at relatively low valuations for REITs. Because of that, they offer above-average dividend yields. That combination makes this trio look like compelling value buys right now. Investors stand to benefit from their attractive income streams and the upside potential in their stock prices as the REIT market recovers in 2021.