Hidden Gems: 11 Severely Undervalued Real Estate Investment Trusts

Summary
• The yields of real estate investment trusts (REITs) are becoming more competitive, especially with the prospect of lower interest rates and low inflation.
• This article identifies 35 equity REITs with yields of 4.75% or higher and undervalued by at least 20%, narrowing the list down to 11 based on dividend safety, balance sheet quality, and growth forecasts.
• Avoid high-yield "fool's gold" stocks and companies with declining income or weak balance sheets to minimize risk and ensure stable returns.

Around this time last year, REIT prices were bottoming out. In an article last November, I wrote:
After two years of dismal sell-offs, real estate investment trusts (REITs) are poised for a rebound. The market is flooded with high-quality REITs offering yields at or near historic highs. Inflation appears under control, almost reaching the Federal Reserve's 2% target. For the foreseeable future, interest rates are likely to remain stable or decline.
Currently, the likelihood of the Fed cutting rates in the near future is high, with further cuts expected by year-end.

iREIT+ Haoya Capital
Lower interest rates and the return of low inflation make REIT yields more attractive. With the "risk-free" 10-year Treasury yield around 3.7% and likely to fall, retirees with some risk tolerance can now find many REITs offering highly competitive yields.
For more risk-averse investors, value investors, and those reliant on dividend income (e.g., retirees), this article lists all equity REITs undervalued by at least 20% with yields of 4.75% or higher. I then narrow the list based on dividend safety, balance sheet quality, and expected growth to identify REITs that not only pay high dividends but are also likely to maintain or significantly increase their share prices over the next year or two.
Last Year's List
But first, let’s quickly review last year’s top 10. The list included:
• Boston Properties (BXP)
• Healthpeak Properties (PEAK), which merged with Physicians Realty Trust (DOC) in March
• Cousins Properties (CUZ)
• VICI Properties (VICI)
• Broadstone Net Lease (BNL)
• Kimco Realty (KIM)
• National Retail Properties (NNN)
• Apple Hospitality (APLE)
• Spirit Realty Capital (SRC), which merged with Realty Income (O) in January
• UDR, Inc. (UDR)
For the breakdown below, I assume dividends remain unchanged for the next 3 months. APR is calculated by extrapolating 256-day returns to 365 days. The total return on the far right is APR + yield. For Healthpeak and Spirit Capital, I no longer have historical quotes, so I simply replaced them with the merged symbols DOC and O.

Source: Author’s calculations
This approach worked very well. Over the past 9 months, REITs have outperformed, with VNQ delivering an annualized return of 38.26%. The portfolio of 10 "Buried Treasures" REITs identified last November outperformed VNQ by 459 basis points, with a median return of 42.85%.

Initial Long List
Below is the list of all 35 equity REITs currently undervalued by at least 20% with yields of 4.75% or higher (100+ basis points above the "risk-free" rate). In this and subsequent tables, "Discount" refers to the discount relative to the target buy price.

Further Screening
Another 4 REITs barely met one criterion but fell slightly short on another. However, none had acceptable dividend safety grades.
• Global Medical REIT (GMRE) ("F")
• Gladstone Commercial (GOOD) ("F")
• Postal Realty Trust (PSTL) ("F")
• Uniti Group (UNIT) ("F")
Often, when a company offers a high dividend yield, it’s precisely because its business is declining. The stock price is falling, and the dividend hasn’t yet been cut, making the yield look very tempting. Investors lured by high yields often regret it when the company slashes its dividend, and momentum investors flee, leaving the yield-chasers in a bind: lower yields and sharply depressed share prices.
While it’s not feasible to examine every company and test its earnings within this article’s scope, we can apply some simple filters. First, we can screen for dividend safety, eliminating companies with poor ratings.
This removes 16 contenders.
Balance Sheet Concerns
Another major risk factor for any company is its balance sheet. Companies with high leverage and/or high debt costs struggle to grow and are more vulnerable to unexpected changes in the business environment.
Our list is now down to 20 companies across 7 sectors. Among our primary candidates, only 10 remain, along with 6 alternates, 4 of which are on shaky ground. Let’s look at their key balance sheet metrics. We want most of these to meet or exceed the averages for their respective REIT sectors. Red flags in two boxes will disqualify a company.
Note: While our initial list included 9 office REITs, all have been eliminated.

Final List

After rigorous screening, we’re left with 11 "treasure" companies. Nine (highlighted in green) offer yields above 5%, stable income, solid balance sheets, and are undervalued by at least 20%. The other two (in yellow) have minor concerns about funds from operations (FFO) growth.

Note: Inclusion on this list does not constitute a recommendation to buy. However, I hope it saves you time by narrowing the field, helping you find the REITs best suited for investment.