Three REITs Approaching Value Territory | Value Investing News

Three REITs Approaching Value Territory

There are several REITs which seem to be punished excessively as of lately. A few, which have caught my eye are listed in more detail in the article.

There is a risk that retail is going down the drain, which would result in bankruptcies and vacancies for landlords. Depending on your beliefs, real estate investment trusts are either bargains today or they are value traps which are destined for mediocrity. Rather than fall for broad generalization, I decided to look at top tenants for each REIT I analyzed in this article, in order to determine the degree to which the business is subject to destruction from online. I also believe that while many retailers will have a harder time earning profits, the landlords that own the real estate have some margin of safety due to the long-term lease contracts. In addition, those landlords could always sell or repurpose those locations.

The other risk for retailers includes potentially higher interest rates, which would make many projects more expensive. Higher interest rates will reduce FFO and cash available to pay dividends to shareholders. The contra-argument to the rising interest rates thesis has been that rising rates are an indication of increased economic activity, which should bode well for landlords. The other contra-argument is that most of the REITs below have staggered maturities, and are mostly capitalized by equity rather than debt. The third contra-argument is that existing debt is already taken at low fixed interest rates. Rising interest rates should affect debt refinancing and profitability spread for new properties. Of course, everyone has been expecting rising interest rates for almost a decade now. Noone can predict the future.

As I mentioned before, I analyze REITs using the guidelines listed in this post. The guidelines include focusing on:

Valuations
FFO trends
Occupancy
Tenant Concentration
Streak Consecutive Annual Dividend Increases

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