3 Oversold REITs – Investment Ideas

Since May 22 – the first day Federal Reserve Chairman Ben Bernanke hinted at “tapering” quantitative easing – the S&P 500 has fallen nearly 7% while the yield of the 10-year Treasury note has risen from 1.89% to 2.55%.

Some of the hardest hit stocks during this selloff have been those with strong yields as higher interest rates have made their dividends comparatively less attractive.

But is this selloff in dividend stocks overdone?

The Fed Giveth, the Fed Taketh Away

A common misperception is that over the last couple of years, yield-starved investors bid up all dividend stocks to untenable valuations and that this recent selloff is just a normal correction for these overbought securities.

That may be the case for some dividend stocks – but not all.

In fact, one of the hardest hit groups has been real estate investment trusts (REITs). But there are many REITs with strong fundamentals there were trading at very reasonable prices before the recent “dividend off” trade.

And after this recent selloff, these stocks look even more appealing for the long-term investor. In fact, from a valuation standpoint many of these stocks are now trading at discounts to their historical averages, which encompasses eras of much higher interest rates.

3 Oversold REITs

Below are three REITs with strong fundamentals trading at very reasonable prices. While they might be out-of-favor right now, this dip could prove to be a good buying opportunity for the long-term investor:

Mid-America Apartment Communities (MAA)

Price Change since May 22: -15.8%

Current Price / Forward Funds from Operation (FFO): 12.4x

Historical Price / Forward FFO: 13.8x

Dividend Yield: 4.4%

MAA is an apartment REIT focused on the Sunbelt region of the United States. It has over 49,000 apartment homes. MAA, like many apartment operators, has been seeing strong increases in rental rates along with multi-year high occupancy rates. Rising interest rates shouldn’t change this trend. Despite solid industry tailwinds, shares are currently trading at a discount to their 10-year historical forward FFO multiple.

Chesapeake Lodging Trust (CHSP)

Price Change since May 22: -14.7%

Current Price / Forward Funds from Operation (FFO): 11.0x

Historical Price / Forward FFO: 11.6x

Dividend Yield: 4.7%

Chesapeake Lodging Trust is a REIT primarily focused on upper-upscale hotels in major business and convention markets and premium select-service hotels in urban settings or unique locations in the United States. It currently owns 18 hotels with a total of more than 5,400 rooms in eight states and the District of Columbia. Management believes current industry dynamics will allow the company to acquire hotels at prices below replacement costs with attractive yields and upside potential. The stock yields close to 5% itself and trades below its historical median forward multiple.

Highwoods Properties (HIW)

Price Change since May 22: -16.1%

Current Price / Forward Funds from Operation (FFO): 11.8x

Historical Price / Forward FFO: 12.3x

Dividend Yield: 5.1%

Highwoods Properties is a REIT that focuses primarily on offices, although it does own some industrial and retail properties. The company owns or has an interest in 334 properties encompassing approximately 35.0 million square feet, along with approximately 649 acres of development land. Its properties are primarily located in the southeastern United States. Highwoods has taken it on the chin the last few weeks like many other REITs, but investors who get in now will pay less than 12x forward FFO and receive a stellar 5.1% yield.

The Bottom Line

Talks of the Fed tapering QE have sent many dividend stocks plunging, especially real estate investment trusts. But these three high-yielding REITs all have strong fundamentals and are currently trading at very reasonable prices. This could present a great buying opportunity for the long-term investor.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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CHESAPEAKE LODG (CHSP): Free Stock Analysis Report
HIGHWOODS PPTYS (HIW): Free Stock Analysis Report
MID-AMER APT CM (MAA): Free Stock Analysis Report
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