The stock market has performed incredibly well in recent years, but one sector that's been a major laggard is real estate. Thanks to interest rates and other headwinds, some real estate investment trusts (REITs) with solid businesses are now trading for unbelievably low valuations. Here are three, in particular, that could be great buys for long-term investors.
While the real estate sector, in general, hasn't performed well recently, mostly due to rising interest rates, these three companies have been especially beaten down. In fact, all three have dropped by 20% or more over the past year alone.
It's also important to note that the best metric for REIT "earnings" is funds from operations, or FFO. This gives a better, more real estate oriented view of earnings than the net income metric that's useful for most other stocks.
With that in mind, here's why you may want to put these three cheap REITs on your radar.
A long-term investment in the millennial generation
EPR Properties has fallen by 25% over the past year and has done especially poorly in recent weeks due to reduced 2018 guidance. While 2018 certainly could be a challenging year for the company, EPR now trades for a bargain valuation and still represents a compelling long-term growth opportunity.
If you're not familiar with the company, EPR invests in three types of commercial properties -- entertainment (mainly megaplex cinemas), recreation (waterparks, ski resorts, and golf attractions such as TopGolf), and education (such as charter schools). The company owns 395 properties in the U.S. and Canada.
The thesis with EPR's experience-oriented properties is that the millennial generation (ages 18-34) values experiences over simply buying things. And since this group will gradually be entering their prime earning years over the next couple of decades, there's a lot of opportunity to capitalize on.
Due to a planned increase in strategic property dispositions, the company anticipates reducing its leverage during 2018, which is likely to be a short-term drag on FFO -- hence, the lowered guidance -- but should allow the company increased financial flexibility to capitalize on opportunities going forward. In the meantime, EPR pays a massive 7.7% dividend yield that's well covered by the company's FFO.
An amazing long-term growth opportunity
The future of healthcare in the United States is admittedly far from certain at this point, but there are some things we know for sure. First, older people use healthcare facilities more than the general population. Individuals in the 65-84 age group, for example, spend more than twice as much on healthcare as the U.S. average. For the 85+ age group, per-capita healthcare spending is roughly five times the average.
Second, the massive baby boomer generation has started to reach retirement age, which will cause the older segments of the population to grow rapidly over the coming decades.
For these reasons, there's a tremendous growth opportunity in senior housing and other senior-focused properties, especially those dependent on reliable private-pay revenue (not Medicare or Medicaid). Welltower not only is the largest healthcare REIT, but it's heavily concentrated in these types of properties.
Welltower owns roughly 1,300 properties and 83% of its net operating income is from senior housing, long-term care, or post-acute care properties. The rest is made up of outpatient medical facilities, which aren't senior-specific, but should also benefit from increased healthcare spending from the aging population over time.
Finally, it's important to mention that one of the reasons for Welltower's underperformance is oversupply issues in the senior-housing industry. Simply put, the demand isn't quite there for all of the new properties that have come onto the market. This could certainly weigh on the stock in the near term, but over time, the rapidly growing senior population should fix the problem naturally.
The right kind of retail to invest in now
Many retail businesses are struggling. This is especially true with higher-end or full-retail-price businesses that specialize in discretionary goods -- that is, things people really don't need. There simply is too much competition from e-commerce and discount retailers.
One smart way to invest in the changing retail landscape is with outlet retail. Outlets offer discounts that often can't be matched online, and also offer unique bargains in stores, creating an experiential component.
Pure-play outlet-shopping REIT Tanger Factory Outlet Centers could be a smart way to take advantage, especially at its current rock-bottom valuation.
Tanger's properties are currently more than 97% occupied and have never fallen below 95% in its 37-year history. This is why the company has increased its dividend for 24 years in a row, and with one of the lowest FFO payout ratios in the real estate sector, there should be plenty of room for future increases.
This is especially true considering Tanger's growth potential. Outlet shopping is still a relatively small part of the retail landscape, and there could be lots of room to grow in the coming decades. Shoppers are becoming increasingly bargain conscious, and this could be a huge positive catalyst for Tanger. With arguably the most recognizable brand name in outlet shopping, Tanger is only in 22 states so far, so there are plenty of underserved markets Tanger could take advantage of in the years ahead.
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