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Number Cruncher Eight well-valued U.S. real estate stocks for income investors

What are we looking for?

Defensive U.S. real estate stocks with high distribution yields, attractive valuation levels and a track record of recent unit price performance.

Markets are feeling pressure around the globe. Looking at the S&P 500, there doesn’t appear to be a major intermediate-term bottom in place just yet. Prices remain bearish below key resistance at 2,950. The uptrend from the start of 2019 has been broken and the index remains below its 50-day moving average, a bearish signal. An ABC corrective wave pattern may be taking place as it did back in May, potentially sending prices lower to test March and June lows at the 2,720 level.

The 10-year Treasury yield dropped below the two-year yield for the first time since 2007. This has created a second inversion of the yield curve as the 10-year yield already fell below the three-month yield this year. Historically, inversions of the yield curve have been signals of a pending recession. The warning signal comes amid rising tensions due to the U.S. trade war with China. It is no surprise investors are seeking a safe haven against plunging global interest rates and fears of a slowing global economy.

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The real estate sector exchange-traded fund (XLRE) has been the only sector with positive performance over the past month. The sector is benefiting on the prospect of lower interest rates in the future as investors look to invest in higher yielding defensive assets.

The screen

We will be using Trading Central Strategy Builder to search for defensive U.S. real estate stocks with high distribution yields, attractive valuation levels, and a track record of recent unit price performance.

We will start by screening for U.S. real estate stocks with a market capitalization of US$1-billion or more. To find real estate investment trusts (REITs) with attractive income properties, we will screen for distribution yields of 4 per cent or more. To ensure we focus on REITs with reasonable valuations, we will filter based on price-to-book ratios of 1.5 or less.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.

What we found

Topping our list is Sabra Health Care REIT (SBRA-Q) with a market cap of US$3.9-billion and an impressive dividend yield of 8.6 per cent. Sabra is a health-care facility REIT, which owns and invests in health care real estate. Sabra’s operations consist of nursing facilities, assisted living centres and mental-health facilities. REITs have been the best performing stocks inside the real estate sector.

The highest distribution yield on our list belongs to Global Net Lease Inc. (GNL-N), a REIT that manages a globally diversified portfolio of commercial real estate properties. Its real estate assets span the United States, Britain, Germany, the Netherlands, Belgium, Luxembourg, France and Finland. The portfolio assets include office, industrial, distribution and retail, with office buildings representing more than half of the properties. The company’s current dividend yield is at 11 per cent with a low price-to-book ratio of 1.06 making the units quite attractive in terms of value.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

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Gary Christie is head of North American research at Trading Central.

Select income-producing U.S. REITs

RankCompanyTickerRecent Price (US$)Market Cap. (US$Bil) P/EPrice to Book Ratio1 Yr Performance (%)Price Performance YTD (%)Div. Yield (%)
1Sabra Health Care REIT Inc.SBRA-Q20.883.9625.11.22-7.826.78.6
2VEREIT Inc.VER-N9.429.1754.61.2724.331.75.8
3Chimera Investment Corp.CIM-N19.303.616.10.914.98.310.0
4Global Net Lease Inc.GNL-N19.361.6488.61.06-11.59.911.0
5Kimco Realty Corp.KIM-N18.417.7725.81.4712.525.76.1
6Spirit Realty Capital Inc.SRC-N45.244.0831.71.489.228.35.5
7Redwood Trust Inc.RWT-N16.851.6514.21.054.511.97.1
8Industrial Logistics Properties TrustILPT-Q21.011.3720.81.35-11.76.86.3

Source: Trading Central

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Editor’s note: A previous version of this article incorrectly stated Sabra Health Care REIT units are trading modestly below their book value. As the table correctly indicates, Sabra's price-to-book value ratio was 1.22 at time of publication.
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