In 2023, REITs faced a challenging landscape marked by the persistent impact of rising borrowing costs, which continued to be the primary factor influencing the sector for the second consecutive year. The high interest rates and limited access to capital contributed to a subdued performance as the overall volume of real estate purchases and sales remained low last year. Negative headlines surrounding vacant downtown office spaces, a consequence of the widespread shift to remote work, further weighed on investor sentiment, collectively contributing to a sideways trajectory for REITs throughout the year. However, despite these challenges, several REITs demonstrated resilience, reporting robust fundamentals driven by an uptick in rental income. The supply-and-demand dynamics in commercial real estate generally favored the market in 2023, with REITs maintaining well-positioned balance sheets to weather the prevailing market conditions.
Looking forward, Fidelity Investments has a cautiously optimistic outlook for the REIT sector in 2024, contingent upon a stabilization of interest rates and a gradual normalization of commercial real estate transaction volumes. Fidelity's interest in shopping centers stems from a nuanced analysis of consumer behavior. While malls, traditionally associated with discretionary spending on luxury items, face headwinds during economic uncertainty, shopping centers have emerged as compelling investment opportunities. These centers cater to essential needs such as grocery shopping and prescription filling, making them more resilient during economic downturns. The trend is further supported by budget-conscious consumers turning to shopping centers amidst weakening household credit quality under high-interest rates. Additionally, the changing lifestyle patterns associated with remote and hybrid work have positioned shopping centers, often located closer to residential areas, as beneficiaries of evolving consumer preferences.
Another sub-sector identified by Fidelity that offers promising long-term growth potential is data centers, driven by the increasing demand from cloud providers to meet massive storage needs. Healthcare real estate, particularly senior housing, is identified as another theme with potential for sustained growth. The aging population in the US and other developed nations is expected to fuel demand for quality assisted living and memory-care facilities. Furthermore, the nationwide shortage of affordable housing has created opportunities in the lower-cost manufactured-housing market. This includes RV resorts and mobile-home communities, particularly those targeting retirees. The business models in this sector offer favorable economics, as the owner/operator primarily owns the land, collects rent, and requires minimal additional investment.
Amidst economic uncertainty since 2022, REIT share prices faced a challenging environment, experiencing a 21.4% decline by December 1, 2023, triggered by a notable increase in the 10-year Treasury yield and REIT implied cap rates. However, there are promising signs for a REIT recovery in 2024, according to a recent report by Nareit. Historically, REITs have demonstrated robust total return performances post-monetary policy tightening cycles, and the expected convergence of valuations between REITs and private real estate in 2024 is likely to attract investors. The solid balance sheets of REITs position them well to navigate ongoing economic uncertainty, offering advantages for acquisitions and growth. The valuation divergence, particularly in capitalization rates, is anticipated to narrow in 2024, making REITs an appealing option for investors compared to private real estate.
On the other hand, Fitch Ratings has a deteriorating outlook for the U.S. equity REITs in 2024 due to widespread market hesitation amid persistent inflation and global uncertainties. Higher borrowing rates, coupled with a slowdown in property market activities, have led to discounted prices for investment-grade REITs, creating opportunities for well-capitalized companies with low leverage and ample liquidity to acquire premium properties. The challenging environment is driven by a combination of factors, including banking sector turmoil in the first half of 2023 and the tightening of lending activities.
Investors looking to explore the REIT sector can pick up the most undervalued stocks like VICI Properties Inc. (NYSE:VICI), Essential Properties Realty Trust, Inc. (NYSE:EPRT), and Urban Edge Properties (NYSE:UE).
Our Methodology
For this article, we used a stock screener and shortlisted the most undervalued stocks in the REIT sector by their PE ratios, which were under 20. The most undervalued stocks according to analysts were chosen by considering their upside potential, relying on analyst price targets as of March 5. The price targets were taken from Yahoo Finance. We have also assessed the hedge fund sentiment from Insider Monkey’s database of 933 elite hedge funds tracked as of the end of the fourth quarter of 2023. The list is arranged in ascending order of the number of hedge fund holders in each firm. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here).
12 Most Undervalued REIT Stocks To Buy According To Analysts
View of a mall entrance, showcasing the retail experiences offered by the company's REIT.
Most Undervalued REIT Stocks To Buy According To Analysts
AFC Gamma, Inc. (NASDAQ:AFCG) specializes in originating, structuring, underwriting, and investing in senior secured loans and other debt securities for established businesses in the cannabis industry. The company focuses on states where medical and/or adult-use cannabis is legalized. AFC Gamma, Inc. (NASDAQ:AFCG) has chosen to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes. It is one of the most undervalued stocks to monitor.
On February 22, AFC Gamma, Inc. (NASDAQ:AFCG) announced that it plans to spin off its commercial real estate portfolio into a new publicly traded company, Sunrise Realty Trust, Inc., intending to achieve REIT status. The spin-off will create two distinct entities – one focusing on the cannabis industry and the other on commercial real estate in the southern United States. AFC Gamma, Inc. (NASDAQ:AFCG) shareholders will receive a pro-rata distribution of Sunrise Realty Trust’s common stock and a special cash dividend of $0.15 per common share, with the separation set for completion in mid-2024.
According to Insider Monkey’s fourth quarter database, 3 hedge funds were bullish on AFC Gamma, Inc. (NASDAQ:AFCG), compared to 7 funds in the prior quarter. John Overdeck and David Siegel’s Two Sigma Advisors is the largest stakeholder of the company, with 46,700 shares worth $561,801.
Like VICI Properties Inc. (NYSE:VICI), Essential Properties Realty Trust, Inc. (NYSE:EPRT), and Urban Edge Properties (NYSE:UE), AFC Gamma, Inc. (NASDAQ:AFCG) is one of the best REIT stocks.
Ready Capital Corporation (NYSE:RC) ranks 11th on our list of the most undervalued stocks. It is a real estate finance company operating in the United States. The company engages in the origination, acquisition, financing, and servicing of different types of loans, including small to medium balance commercial loans, small business administration loans, residential mortgage loans, construction loans, and mortgage-backed securities. On February 27, Ready Capital Corporation (NYSE:RC) reported a Q4 non-GAAP EPS of $0.26 and a revenue of $112.55 million, falling short of Wall Street estimates by $0.03 and $137.99 million, respectively.
According to Insider Monkey’s fourth quarter database, 6 hedge funds were bullish on Ready Capital Corporation (NYSE:RC), compared to 9 funds in the prior quarter. Dmitry Balyasny’s Balyasny Asset Management is the largest stakeholder of the company, with 1.32 million shares worth $13.5 million.
10. Innovative Industrial Properties, Inc. (NYSE:IIPR)
Number of Hedge Fund Holders: 11
Average Upside Potential: 20%
PE Ratio as of March 5: 17.07
Average Analyst Price Target: $117.40
Innovative Industrial Properties, Inc. (NYSE:IIPR) specializes in acquiring, owning, and managing properties dedicated to regulated cannabis facilities. The company leases these properties to experienced, state-licensed operators. Innovative Industrial Properties, Inc. (NYSE:IIPR) has opted for real estate investment trust (REIT) taxation. It is one of the most undervalued stocks to invest in. On February 26, Innovative Industrial Properties, Inc. (NYSE:IIPR) reported a Q4 FFO of $2.07 and a revenue of $79.16 million, outperforming Wall Street estimates by $0.05 and $2.68 million, respectively. Revenue for the quarter increased 12.3% year-over-year.
According to Insider Monkey’s fourth quarter database, 11 hedge funds were long Innovative Industrial Properties, Inc. (NYSE:IIPR), compared to 16 funds in the prior quarter. Stuart J. Zimmer’s Zimmer Partners is the largest stakeholder of the company, with 950,628 shares worth nearly $96 million.
9. Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI)
Number of Hedge Fund Holders: 14
Average Upside Potential: 31.1%
PE Ratio as of March 5: 18.25
Average Analyst Price Target: $33.18
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) is one of the most undervalued stocks in the REIT sector. The company is involved in investing in energy efficiency, renewable energy, and sustainable infrastructure markets within the United States. The company's diverse portfolio includes equity investments, government and commercial receivables, real estate, and debt securities. On February 15, Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) declared a $0.415 per share quarterly dividend, a 5.1% increase from its prior dividend of $0.395. The dividend is to be paid on April 19, to shareholders on record as of April 5.
According to Insider Monkey’s fourth quarter database, 14 hedge funds were bullish on Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI), compared to 17 funds in the last quarter. Philip Hempleman’s Ardsley Partners is the largest stakeholder of the company, with 781,750 shares worth $21.5 million.
Aristotle Small/Mid Cap Equity Strategy made the following comment about Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) in its first quarter 2023 investor letter:
“Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI), a Maryland-based sustainable asset financing and investing company was added to the portfolio. We believe the company remains uniquely positioned to benefit as the demand for sustainable energy and infrastructure continues to grow. Additionally, we believe the company’s diverse portfolio, emphasis on proven technologies and long-term partnerships will result in less cyclical, lower risk, more predictable cash flows which can drive shareholder value in periods to come.”
Kimco Realty Corporation (NYSE:KIM) ranks 8th on our list of the most undervalued stocks. It is a real estate investment trust that operates open-air, grocery-anchored shopping centers in North America. The company also holds a growing portfolio of mixed-use assets. On February 8, Kimco Realty Corporation (NYSE:KIM) declared a $0.24 per share quarterly dividend, in line with previous. The dividend is payable on March 21, to shareholders on record as of March 7.
According to Insider Monkey’s fourth quarter database, 17 hedge funds were bullish on Kimco Realty Corporation (NYSE:KIM), compared to 16 funds in the prior quarter. Ken Griffin’s Citadel Investment Group is the leading stakeholder of the company, with 5.2 million shares worth $111.28 million.
Horizon Kinetics made the following comment about Kimco Realty Corporation (NYSE:KIM) in its Q1 2023 investor letter:
“The return differential between land and the REIT model can be observed at another relatively long-lived company. The inherent economics of a business emerge with the benefit of time, which blurs the noise of quarterly and annual results. One of the oldest publicly traded REITs is Kimco Realty Corporation (NYSE:KIM), which predates even Simon Property Group. 14 Kimco came public near year-end 1991, so it has a 30-plus year operating history. It has an $11 billion stock market value and is one of the 30 companies in the REIT sector of the S&P 500. The REIT sector has an aggregate market cap of $773 billion; this figure will be mentioned again very shortly.
Kimco revenues have risen 10.7% annually since 1991, and flow of funds from operations have compounded at 11.2%. This is very creditable, as far as it goes…”(Click here to read the full text)
Arbor Realty Trust, Inc. (NYSE:ABR) is an investment company focusing on a diversified portfolio of structured finance assets in the multifamily, single-family rental, and commercial real estate markets in the United States. The company qualifies as a real estate investment trust for federal income tax purposes, with a commitment to distributing at least 90% of its taxable income to stockholders. Arbor Realty Trust, Inc. (NYSE:ABR) is one of the most undervalued stocks to invest in.
On February 16, Arbor Realty Trust, Inc. (NYSE:ABR) declared a quarterly dividend of $0.43 per share, in line with previous. The dividend is payable on March 15, to shareholders on record as of March 4. The company also reported a Q4 non-GAAP EPS of $0.54 and a revenue of $103.58 million, exceeding Wall Street estimates by $0.09 and $5.93 million, respectively.
According to Insider Monkey’s fourth quarter database, 17 hedge funds were bullish on Arbor Realty Trust, Inc. (NYSE:ABR), compared to 13 funds in the last quarter. Leon Cooperman’s Omega Advisors is the largest stakeholder of the company, with 2.38 million shares worth over $36 million.
Silver Beech Capital made the following comment about Arbor Realty Trust, Inc. (NYSE:ABR) in its second quarter 2023 investor letter:
“Arbor Realty Trust, Inc. (NYSE:ABR) is a small-capitalization mortgage REIT that primarily originates bridge multifamily and single-family home loans. Arbor also has in-house asset-light agency loan origination and mortgage servicing right segments that are a good strategic fit for properties that mature out of Arbor’s bridge multifamily loan program. Over the last decade, in part due to Arbor’s unique business combination and capital allocation strength, the company has earned among the highest returns on equity and shareholder returns in the mortgage REIT sector.
On March 14, an unidentified short seller published a report that claimed Arbor had engaged in fraud by hiding toxic assets off-balance sheet, reporting fake revenues, and accused management of looting funds from the company, among several similar claims. The report’s claims were among the most extraordinary we have read in a short report and resulted in a dramatic decline in the company’s share price. Additionally, the report was released three days after Silicon Valley Bank was put into foreclosure by the FDIC. Investor fear and the short report drove selling, compounded by a Wall Street Journal article highlighting a multifamily loan to a distressed Houston project…” (Click here to read the full text)
Rithm Capital Corp. (NYSE:RITM) operates as an asset manager with a focus on real estate, credit, and financial services. Rithm Capital Corp. (NYSE:RITM) qualifies as a real estate investment trust for federal income tax purposes, making it exempt from federal corporate income taxes if it distributes at least 90% of its taxable income to stockholders. On February 7, Rithm Capital Corp. (NYSE:RITM) reported Q4 earnings that were less of a decline than anticipated. Additionally, the company announced new share repurchase programs for both common and preferred shares, with a total allocation of up to $300 million.
According to Insider Monkey’s fourth quarter database, 19 hedge funds were long Rithm Capital Corp. (NYSE:RITM), compared to 24 funds in the preceding quarter. Israel Englander’s Millennium Management is the biggest stakeholder of the company, with 3.18 million shares worth $34 million.
Like VICI Properties Inc. (NYSE:VICI), Essential Properties Realty Trust, Inc. (NYSE:EPRT), and Urban Edge Properties (NYSE:UE), Rithm Capital Corp. (NYSE:RITM) is one of the most undervalued stocks in the REIT space.
