Summary

  • This article is second in a series.
  • The names are culled from the top fifty stocks held by the Vanguard Real Estate ETF.
  • Many of the names in the series are from out-of-favor sectors.

Over the last three months, I’ve included my stock rating system scores in each of my articles. This resulted in readers requesting additional names of highly ranked stocks. I responded with a series of articles on the top twenty companies of the 200 I track. That series popularity prompted me to write an article on my system’s ten best valued Dividend Aristocrats. Now I follow that with this series of attractively valued REITS.

I confined my search to the top 50 REITs held by the Vanguard Real Estate ETF (VNQ). I should caution that the REITs on this list do not necessarily constitute the best investments. Valuation alone does not indicate that a stock is worthy of consideration. At times, shares of a company are understandably undervalued due to headwinds that signal poor prospects.

I will add that my experience indicates REITs tend to trade for a bit of a premium in relation to many dividend bearing stocks. I posit that yield hungry investors are willing to pay a slightly higher price for companies with the sort of dividends provided by REITS. I believe that should be considered when weighing the results of my system’s valuation scores.

5. Gaming and Leisure Properties (GLPI)

This company is underfollowed and probably underappreciated. GLPI has a yield hovering a bit below 6.5%. The company leases real estate property to gaming operators in triple net lease arrangements.Thefirm owns 46 properties in 16 states. Although the geographical diversification of the company’s properties provides a degree of safety for investors, there are other bulwarks in the firm’s makeup that should help one sleep well at night.

Most of GLPI’s casinos have the top market share in their area, and no one property accounts for more than 5% of revenues. The properties are on triple net leases, and lease payments are due from its tenants prior to payment of debt obligations. Should tenants opt out of a lease renewal, they are required to leave the gaming equipment on premises. Furthermore, to end the lease, an operator must sell everything within the property, including the gaming license, to a successor. In other words, tenants aren’t going to set up shop across the street and compete with GLPI. Furthermore, one must consider that obtaining gaming licenses is not a simple task.

GLPI has a strong balance sheet with well laddered debt maturities.

Activist investor Jonathan Litt has a large position in GLPI and is nudging the company to combine with Vici Properties (OTC:VICI). According to Litt, “A merger between GLPI and VICI could see GLPI have 20-25% upside and materially reduce tenant concentration for both companies based on our analysis.”

An analyst for Nomura Instinet agrees with Litt’s assessment. “VICI could (but likely would not) pay up to $52/share for GLPI before a deal would be dilutive,” the Nomura Instinet analyst wrote.

With a dividend payout rate a hair below 80%, and a dividend with CAGR of 5.5%, GLPI appears to be a safe, high yield play for income investors.

Headwinds

I question whether GLPI can continue to grow at the rate seen in years past.

The company has only four operators, and the largest contributes nearly 80% of GLPI’s revenues. While I think it unlikely that those enterprises will fail, that degree of concentration is worrisome.

Economic downturns weigh heavily on the casino industry; however, GLPI’s operators fare better than those in Las Vegas.

Valuation

As I type these words, GLPI shares sell for $43.79.

My Valuation Score for GLPI is 93, and my Overall Score is 68. (My rating system is outlined below.) There are few analysts covering this firm: Nomura Instinet has a target price of $45, Scotiabank’s target is at $42, and Credit Suisse has a price target of $42.

According to MarketBeat, the average analysts’ 12-month target price for the firm is $44.29.

My rating system does not provide a dollar amount for valuations; however, the score indicates GLPI is trading below fair value.

4. Omega Healthcare Investors (OHI)

Omega has a portfolio of long-term healthcare facilities and mortgages on healthcare facilities in the US and the UK. The company provides leases and mortgage financing to assisted living, independent living, skilled nursing and acute care facility operators. The firm has a well staggered lease expiration profile well into this decade.

Although Omega has a significant debt load, the company has a respite from debt maturities until 2023. The firm also boasts an investment-grade credit rating, BBB- or equivalent from the principal rating agencies.

Omega bulls will point to demographics indicating the age cohort of those 75 years and older will increase markedly in the next two decades.

The company has a 17 year history of raising the dividend, which currently stands at roughly 6.4%.

Headwinds

Omega has a number of operators that are experiencing difficulties.

Valuation

As I type these words, OHI shares sell for $41.86.

My Valuation Score for Omega is 93, and my Overall Score is 60. (My rating system is outlined below.) Mizuho has a price target of $50, Bank of America $44.50 and Berenberg Bank has a price target of $47.

According to MarketBeat, the average analysts’ 12 month target price for the firm is $43.41.

My rating system indicates OHI has a fair value near the upper end of the above targets.

3. SL Green Realty Corp (SLG)

The company is the largest owner of office space in New York City. SLG focuses on high-quality properties, located primarily in midtown Manhattan. The central location and quality of SLG’sproperties, as well as the nature of the clientele seeking the company’s office spaces, drives demand for the firm’s offerings. This in turn allows SLG to charge premium rates.

New York City is the world’s financial epicenter, and recently the city surpassed the Bay Area as the largest market for tech employment.

SLG has a reasonable debt profile.

The company also has a robust stock buyback program. The firm took advantage of a recent plunge in the share price to repurchase 18% of the company’s stock. To fund the buyback program, management utilized funds garnered from the sale of noncore assets.

SLG’s yield hovers around 3.9%. The recent buybacks will save the firm $64 million in annual dividend payments.

SLG’s management is topnotch. In the late nineties, the company began as a redeveloper of Class B properties but quickly transitioned to a REIT with a commanding presence in Manhattan. The firm’s performance during the last recession testifies to management’s expertise: same-store NOI decreased by roughly 200 basis points, then quickly rebounded to 4% annual growth

Headwinds

Developments in the Hudson Yards neighborhood on the western edge of Manhattan will add over 10 million square feet of mostly Class A office property. There are also significant supply additions in lower Manhattan and east midtown.

Valuation

As I type these words, SLG shares sell for $90.21.

My Valuation Score for FRT is 100, and my Overall Score is 69. (My rating system is outlined below.) Morningstar has a FV of $100, CFRA of $85.04. SunTrust Robinsonhas a target price of $105.

According to MarketBeat, the average analysts’ 12-month target price for the firm is $94.53.

My rating system indicates SLG trades well below fair value, likely near the greater of the target prices set above.

2. Vornado Realty Trust (VNO)

Vornado has a profile somewhat like that of SLG in that it develops and leases high-quality office properties in New York City with an emphasis on Manhattan. However, the company also invests in retail properties: roughly a fourth of the firm’s NOI comes from New York retail.An additional 10% of NOI is derived from premium properties in Chicago and San Francisco.

The company possesses a strong balance sheet with substantial cash and available liquidity ($3.36 billion total). Vornado has investment grade debt, Baa2/BBB, with a weighted average debt maturity of 3.6 years. The firm also boasts $9 billion in unencumbered assets.

Vornado’s current yield is a hair below 4%.

Headwinds

New developments may create an oversupply of office space in New York City. Although the company’s retail holdings provide some diversification, brick and mortar retail faces pressures from e-commerce.

Valuation

As I type these words, Vornado shares sell for $65.98.

My Valuation Score for VNO is 100, and my Overall Score is 72. (My rating system is outlined below.) Morningstar has a FV of $68, CFRA has a FV of $145.18, and Argus rates the company as a Hold.

According to MarketBeat, the average analysts’ 12 month target price for the firm is $72.86.

My rating system indicates VNO trades well below fair value.

1. Ventas Inc (VTR)

Over the past sixteen years, Ventas’ total average annual shareholder return is several hundred basis points above the S&P 500. This speaks to the stellar management team guiding this company.

Through a spin-off and other sales of properties in 2017 and 2018, Ventas divested of most of its skilled nursing facilities. In so doing, the firm transitioned to a portfolio consisting of medical office buildings, life science operators, hospitals, and senior housing.

Via the company’s acquisitions of the real estate ofLillibridge, an operator of medical offices, Wexford a life science operator and developer, and Ardent Health Services, an acute-care hospital owner and operator, Ventas now has interests in top quality operators in differing health care segments.

While bulls point to the aging US demographics, an oversupply of senior housing provides stiff headwinds in that sector. However,construction starts slowed dramatically in 2019.

Ventas has a strong debt maturity profile. The company currently boasts a yield a bit above 5.5%.

Headwinds

An oversupply of senior housing has and may continue to weigh on Ventas’ operations.

Government regulation can have an adverse effect on all companies in this space and changes related to this area cannot always be anticipated.

Valuation

As I type these words, Ventas shares sell for $57.04.

My Valuation Score for VTR is 100, and my Overall Score is 69. (My rating system is outlined below.) Morningstar has a FV of $64 and CFRA of $49.67. Argus has a price target of $67.

According to MarketBeat, the average analysts’ 12 month target price for the firm is $64.57.

My rating system indicates this company has a fair value that is likely near the upper range of the figures cited above.

My Perspective

Regarding GLPI, I initiated a small position in the company following my investigations for this article. While I doubt the firm will provide outsized capital gains, I believe the dividend will remain safe and grow at a rate that exceeds inflation. I understand the shares will likely falter in the event of an economic downturn, but I may use an event of that nature to increase my holdings in the company.

Of the ten names I profiled in this series, I am the most circumspect regarding OHI. In fact, I owned OHI on two occasions. In each instance, I sold the shares for a low double figure gain. I am reluctant to invest in OHI as I view the future of the company as too opaque. I point to the two charts below, both featured in OHI’s investors’ presentations, as evidence that the hoped-for increase in occupancy rates is not coming to fruition. Omega failed to grow FFO per share over the last three years. Although that is largely due to tenant bankruptcies, I am fearful of the possibility of additional disruptions to the company’s revenues caused by struggling tenants.

I believe SLG and VNO trade for reasonable valuations; however, new construction could result in a surplus of office space in New York City. I readily confess that I do not have an in depth knowledge of real estate in that area, This prevents me from forming a sound assessment of the two companies prospects. Consequently, I am hesitant to invest at these levels.

I own a moderate position in VTR I entered into recently. I believe the company’s current valuation combined with an exemplary management team provide a reasonable risk/reward profile.

Understanding The Rating System
I follow approximately 200 dividend bearing companies. The middle of each month, I review each company and provide updated scores.

For example: My Valuation Score for VTR is 100, and my Overall Score is 72.

The first number represents the Fair Value of the company and measures numerous valuation metrics. The highest FV score possible is 100. A company is considered significantly undervalued with a score of 83 or higher. A company trading near fair value would score a between 67 and 82.

The second number represents the overall score of the company. This takes into account the moat, management, past and projected growth rates, financial strength, historic ROIC, and valuation of the company. The highest score possible is a 100. A score of 83 or higher is rare.

The rating system is far from foolproof; however, my initial testing (it has been in use for over a year) indicates a Valuation Score of 83 combined with an Overall Score of 63 provides investment targets that often outperform the market. The overwhelming majority of companies score far below 83 for valuation and 63 overall.

It is important to note that I rerate each company in the middle of each month. An event between rerating periods can cause a marked change in a company’s valuation score. This is particularly true when quarterly results are provided between rerating periods and the company misses projections by a wide margin.

My list of 10 stocks constitutes the best scoring firms among the 50 REITs I follow. The overall market is trading at a high valuation. Consequently, most companies’ shares are also trading at high levels. This does not mean that I advocate investing at these levels. In prior articles regarding companies rated as undervalued, you may note that I am often selling puts in the listed companies at a share price significantly below the current value.

One Last Word

I hope to continue providing my articles without cost to SA readers. If you found this article of value, I would greatly appreciate your following me (above near the title) and/or pressing “Like this article” just below. This will aid me greatly in continuing to write for SA. Best of luck in your investing endeavors.

Author: Chuck Walston

Source: Seeking Alpha: My 10 Most Undervalued REITs: Numbers 5 Through 1

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