Most stocks trade at lower valuations these days due to the sell-off in the broader market. However, while that's made most stocks cheaper, some really stand out for their bargain-basement prices relative to their rivals.
That's true of real estate investment trusts (REITs) Essex Property Trust (NYSE: ESS), Digital Realty Trust(NYSE: DLR), and Stag Industrial(NYSE: STAG). All three trade at lower valuations compared to their peer group, meaning they offer much higher dividend yields. That makes them great options for value-hunting investors seeking to boost their income stream.
Essex Property Trust: An inexpensive landlord
Essex Property Trust has one of the best dividend track records in the REIT sector. The apartment REIT has increased its dividend payment for 29 straight years, one of the longest streaks among REITs. It has grown the payout by over 450% since its initial public offering in 1994.
Usually, companies with elite track records trade at premium valuations compared to their peers. However, that's not the case with Essex. It trades at a bottom-of-the-barrel valuation compared to its rivals, as seen in the chart:
Apartment REIT | 2023 Price-to-FFO Estimates | Dividend Yield |
|---|---|---|
AvalonBay Communities | 16.9 times | 3.9% |
Camden Property Trust | 17.3 times | 3.7% |
Equity Residential | 16.9 times | 4.2% |
Essex Property Trust | 14.9 times | 4.3% |
Mid-America Apartment Communities | 18.1 times | 3.7% |
Data source: NAREIT and Google Finance.
Essex has the lowest valuation in its peer group. That's a big reason why it also has the highest dividend yield.
The likely factor driving the lower valuation is the REIT's sole focus on owning apartments on the West Coast. That region of the country isn't growing as fast as the Sun Belt, where many rivals own properties.
However, the West Coast apartment market benefits from strong demand drivers and limited supply. Because of that, rents continue to rise, enabling Essex to grow shareholder value. That makes it stand out as a more attractive investment opportunity than its peers these days.
Digital Realty: A cheap way to play the data center megatrend
Digital Realty is one of two remaining publicly traded data center REITs following a consolidation wave in the sector over the past couple of years. It trades at a much lower value than rival Equinix at 16.9 times its 2023 FFO estimate, compared to 23.5 times for Equinix. That lower valuation (along with a higher payout ratio) is why it offers a much higher dividend yield of 4.6% compared to 2% for Equinix.
The likely cause of Digital Realty's lower valuation is that it's facing more growth-related headwinds from higher interest rates and foreign exchange fluctuations. The company's guidance range suggests its core FFO per share will be roughly flat with last year's level. That could put its dividend growth streak in jeopardy. For comparison, Equinix expects its adjusted FFO to increase by 4% to 7% per share this year.
However, while Digital Realty faces some near-term headwinds, the long-term outlook remains bright. The company continues to benefit from strong demand for its data center solutions. That's leading it to invest heavily in expanding its portfolio. Those investments should help reaccelerate growth in the future.
Stag Industrial: A dirt cheap way to play this red-hot real estate market
Stag Industrial has one of the lowest valuations among industrial REITs. The company currently trades at 15.8 times its 2023 FFO estimate. That's well below the peer group average of 21 times. It's a big reason why Stag offers a much higher dividend yield of 4.6% while many peers are below 3%.
The main factor behind the lower valuation is that Stag Industrial has a diversified portfolio of industrial properties, including warehouses and light manufacturing facilities. Meanwhile, most of its higher-priced peers focus solely on warehouses. That sector is benefiting from strong demand from the accelerating adoption of e-commerce and the impact supply chain issues have on how businesses manage their inventory.
However, Stag Industrial has ample exposure to that market. Further, demand for manufacturing space is strengthening as more companies onshore their capacity because of supply chain issues. Those factors are helping drive strong rent growth for Stag. This means Stag offers investors access to those growing markets at a much cheaper valuation.
Real estate bargains
Essex Property, Digital Realty, and Stag Industrial all trade at much lower valuations than their peers, meaning investors can lock in higher dividend yields. In addition, they could capture higher total returns since their valuations could move closer to the peer group average. That combination of a higher yield and upside potential makes them look like attractive bargain buys right now.
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Matthew DiLallo has positions in AvalonBay Communities, Camden Property Trust, Digital Realty Trust, Equinix, Mid-America Apartment Communities, and Stag Industrial. The Motley Fool has positions in and recommends Camden Property Trust, Digital Realty Trust, Equinix, Mid-America Apartment Communities, and Stag Industrial. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.
