Real estate investment trusts (REITs) rallied sharply this year. Overall, the average REIT has delivered a roughly 30% total return.
However, despite that rally, several REITs are still relatively cheap, including Preferred Apartment Communities (NYSE: APTS), Medical Properties Trust (NYSE: MPW), and W.P. Carey (NYSE: WPC). Here's why these REITs shouldn't remain cheap for too much longer.
Refocusing its strategy
Preferred Apartment Communities is a residential REIT with a unique strategy. The company has used preferred equity (hence the first part of its name) to finance its expansion that has also included owning offices, student housing, and grocery-anchored shopping centers.
Unfortunately, this diversification strategy hasn't paid off for investors, which is why it trades at the lowest valuation in the apartment REIT sector. At about 13 times its FFO, it's well below the sector average of more than 25 times.
That's leading Preferred Apartment Communities to shift gears. It has sold off its student housing and office portfolios, using the cash to redeem preferred equity, repay debt, and expand its multifamily operations. The company is focusing on financing multifamily development projects and making stabilized acquisitions in the fast-growing Sun Belt region.
That pivot is already starting to unlock the value of the company's portfolio. Shares have rallied more than 65% so far this year. However, they have plenty of room to run, given how cheap they are versus other multifamily REITs.
An undervalued value creator
Medical Properties Trust is a healthcare REIT focused on owning hospitals. Its shares have lagged this year, falling about 6% despite delivering double-digit FFO growth. Because of that, it trades at about 12.2 times its 2021 FFO estimate. That's dirt cheap considering that the average healthcare REIT sells for more than 18 times FFO.
That discount is entirely unwarranted. For starters, Medical Properties Trust has increased its dividend for eight straight years, growing it at a 5% compound annual rate. For comparisons' sake, the average healthcare REIT has delivered -10% compound average annual dividend growth during that time frame because several have slashed their payouts due to issues facing the senior housing sector.
Hospitals have proven to be more valuable in recent years, as they've become ground zero in helping fight the pandemic. That's led Medical Properties Trust to recently take a step to unlock and showcase the underlying value of its properties by forming a joint venture with a private equity fund.
That fund purchased a 50% interest in eight of the company's hospitals in Massachusetts, valuing them at $1.78 billion. That's 48% more than Medical Properties paid for these facilities in 2016. This deal gave the company the funds to acquire additional hospital facilities. At some point, investors will realize that this REIT is ridiculously cheap.
A low-cost way to grab a piece of this red-hot sector
W.P. Carey has also underperformed this year, only rising about 6%. Because of that, the diversified REIT trades at less than 18 times its FFO, which is below its peer group average of 23.7 times.
W.P. Carey looks even cheaper when considering its focus on industrial real estate. That sector currently makes up 48% of its portfolio, which is rapidly growing after allocating 70% of its $1.2 billion of acquisitions this year on those properties. Industrial properties are in high demand due to supply chain issues and the accelerating adoption of e-commerce. That's driving up rental rates and property valuations.
As a result, the average industrial-focused REIT trades at more than 33 times its FFO. Once investors realize that these properties make up a growing percentage of W.P. Carey's portfolio, it should help unlock more of its underlying value.
Great REITs for value-conscious investors
Investors have bid up the share prices of most REITs this year, making them look like less attractive values. However, several REITs still look cheap, including Preferred Apartment Communities, Medical Properties Trust, and W.P. Carey. They shouldn't remain cheap for long, given the moves all three are making to unlock and highlight the value of their core portfolios. Because of that, value-focused investors will want to get them while they're still cheap.