We're clearly getting late in the game in the current U.S. real estate cycle, but there aren't buckets full of bargains available right now. Still, analyzing valuations, insider activity and activist buying can identify a few REITs worth considering -- including the five below.
Let's check them out:
First Potomac Realty Trust (FPO)
This REIT owns office parks and office building in and around Washington, D.C. -- and having lived near the District for a good portion of my life, I know that it's one of the world's most stable commercial real estate markets. After all, D.C.'s major industries are the U.S. government and the people who want something from it, and those two groups never shrink in size.
This REIT first came to my attention when activist Jonathan Litt began talking about the stock late last year. He originally estimated First Potomac's net asset value at about $16 a share vs. the stock's current roughly $9.60 share price.
However, I think even that will turn out to be a little low by the time FPO completes an ongoing major restructuring of its portfolio and balance sheet. First Potomac has about $350 million of properties that it considers non-core and plans to sell. The firm plans to use the proceeds to reduce debt and buy back preferred shares.
FPO already yields about 4.35%, and I think the REIT's five-year total-return potential is high. After all, Uncle Sam and the people who petition him for contracts and benefits will always be with us -- and always need office space.
American Farmland (AFCO)
This REIT is trading at bargain levels right now. In fact, management has expressed concern with the discount to NAV.
The stock is cheap because a significant percentage of AFCO's agricultural operations are in water-starved California, which many investors see as a problem. CEO Thomas S.T. Gimbel addressed the discount in American Farmland's latest earnings release, saying: "While we are extremely proud of the high-quality farmland portfolio that we have assembled, we are disappointed with the stock-price performance of our shares, which have consistently traded at a substantial discount to our NAV since our IPO last year."
He said management "believes our NAV reasonably reflects the value of our properties. Accordingly, we recently announced the commencement of a review of strategic alternatives aimed at enhancing shareholder value."
At first glance, it looks like AFCO needs to sell either the company as a whole or just its California properties. After all, a farm REIT with operations in only water-rich areas would be incredibly attractive.
Michael Burry of The Big Short fame has said that the best way to the handle water shortages developing around the world would be to grow food in water-rich areas and sell it to dry regions. So, it'd be a smart move for AFCO to sell its West Coast properties and use the proceeds to buy additional farmland in the Corn Belt, Mississippi Delta and Southeast.
Alternatively, selling the entire company at a premium to book value would generate solid returns for investors, as AFCO currently trades at just some 80% of book value. Fortunately, the stock yields about 4%, so shareholders can get paid to wait for American Farmland to complete its strategic review.
Other Promising REITs
Some other names to check out:
- I've written several times before about Ashford Hospitality Trust (AHT), and I think smart investors should still consider buying the stock at current levels.
- BRT Realty Trust (BRT) is also available at bargain levels, as the market has yet to fully recognize its transformation from a real estate lender to a multifamily operator.
- Pico Holdings (PICO) has said that it's looking to monetize its assets and return the proceeds to shareholders via a special dividend or stock buyback. PICO owns a water-resource-development company and a 56.9% interest in UCP Inc. (UCP).
The Bottom Line
Even though we're late in the current real estate cycle, that doesn't necessarily mean that we're about to see a market collapse or even any major price declines. We could simply get a flat market for some period of time.
But in that sort of an environment, the price you pay for a property or REIT could mean the difference between success or failure. It's going to be more difficult to grab hot sectors like industrial and multifamily properties and simply let momentum make your money for you.
Fortunately, I believe REITs like the ones above still offer investors the chance to make money over the next five years.
