real estate investment trust stocks better known as reits were battered by the past year’s bear market on the bright side that means many of them are trading at discount prices while still offering investors income through their highdividend payouts reits are companies that own portfolios of properties office buildings shopping centers hotels apartments and more the properties generate income from rent and capital appreciation they differ from traditional stocks in that they are then required to pay out at least 90 of that income to investors in the form of dividends making them an attractive play for incomefocused investors it’s been an up and down ride for stocks tied to real estate prior to 2022 low interest rates and a booming economy drove up property values and rents but last year surging interest rates and worries about a recession hammered the sector the morningstar real estate index—which measures the performance of mortgage companies property management companies and reits—fell further than the overall stock market as of jan 27 2023 the index had lost 205 for the trailing 12month period while the broader stock market fell 154 as measured by the morningstar us index that’s left plenty of undervalued reit stocks such as apartment complex owner avalonbay communities avb and others that are worth considering for longterm investors of the 107 real estate stocks in the index 37 are covered by morningstar equity analysts of those 27 were undervalued as of jan 27 2023 “despite the volatility and uncertainty of the housing market over the past three years real estate remains a valuable part of an investor’s portfolio” writes jeremy pagan a research analyst at morningstar we looked for the most undervalued stocks in the morningstar real estate index that currently carry a morningstar rating of 5 stars all of which happen to be reits these were the nine most undervalued stocks in the morningstar real estate index as of jan 27 the most undervalued reit stock was mall operator macerich trading at a 53 discount to the fair value estimate set by morningstar analysts it also has a forward dividend yield of 515 “macerich has successfully repositioned the company over the past decade as a true owner and operator of class a regional malls over the past 10 years the company has sold over 4 billion in mostly lowerquality assets either directly owned or owned through joint ventures and recycled the capital into acquiring new class a malls buying out its partners’ share in the unconsolidated portfolio or redeveloping its own portfolio as a result the company’s portfolio should produce higher tenant sales productivity occupancy levels and rent and therefore is much better positioned to face the economic headwinds of ecommerce we expect macerich to continue improving its portfolio through redevelopment opportunistic acquisitions and asset sales which should deliver strong earnings growth for macerich over time “however macerich is still dealing with the fallout of the coronavirus pandemic foot traffic at brickandmortar locations fell during the pandemic and while macerich’s revenue is somewhat protected by longterm leases it may take a few years for the company’s occupancy to recover from the 90 level it fell to during the pandemic additionally macerich was forced to offer rent concessions to keep some tenants afloat we believe that class a malls will rebound and these highquality malls will eventually return to their prior occupancy and rent levels but the shortterm impact to macerich’s cash flow has been significant” “park hotels  resorts is the secondlargest us lodging reit focusing on the upperupscale hotel segment the company was spun out of narrowmoat hilton worldwide holdings hlt at the start of 2017 since the spinoff the company has sold all the international hotels and 15 lowerquality us hotels to focus on highquality assets in domestic gateway markets “in the short term the coronavirus significantly impacted the operating results for park’s hotels with highdoubledigit revpar declines and negative hotel ebitda in 2020 however the rapid rollout of vaccinations across the country allowed leisure travel to quickly recover leading to significant growth in 2021 and 2022 we think the company should continue to see strong growth as business and group travel also recover to prepandemic levels with park eventually returning to 2019 levels by the end of 2024 in our estimate” “uniti’s business is primarily premised on leasing fiber to its customers current returns stem almost entirely from its master lease agreement or mla with windstream which provided more than 80 of total ebitda in 2021 while the windstream business alone may generate durable excess returns we agree that it was imperative for management to diversify and reduce customer concentration in addition to pursuing saleleaseback transactions with similar economics to its windstream deal management has acquired and built other fiber assets which it has leased both to carriers and enterprises windstream went from making up 96 of revenue in 2015 to 61 in 2021 and uniti is striving to cut the share to 50 however with the diversification comes a bigger asset base that the firm needs to similarly prove it can earn excess returns on “with its lease renegotiation with windstream which makes up about 60 of uniti revenue and over 80 of ebitda now finalized uniti is on much more stable financial footing and can continue on the path it was on prior to the windstream uncertainty maintaining itself with reliable returns and cash flow from windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber which carry longterm certainty and virtually no operating costs” “pebblebrook hotel trust is the largest us lodging reit focused on owning independent and boutique hotels after pebblebrook merged with lasalle hotel properties in december 2018 the company owns 51 upperupscale hotels with more than 12800 rooms located in urban gateway markets pebblebrook’s combined portfolio has a higher revenue per available room price point and ebitda margin than its hotel reit peers “in the short term the coronavirus outbreak significantly affected the operating results for pebblebrook’s hotels with highdoubledigit revpar declines and negative hotel ebitda in 2020 however the rapid rollout of vaccinations allowed leisure travel to quickly return driving high growth in both 2021 and 2022 we think the company should continue to recover as business and group travel eventually returns to 2019 levels by 2024 in our basecase scenario” “kilroy realty is a reit that owns develops acquires and manages premier office life science and mixeduse real estate properties in los angeles san diego the san francisco bay area seattle and austin it owns over 115 properties consisting of approximately 15 million square feet the company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline we also welcome management’s focus on esg as it aligns its office portfolio to meet the sustainability requirements of its clients “in our base case we assume the company performs largely in line with the regional dynamics affecting the west coast office markets in the short term we expect the company to experience flattish occupancy rates and the rental rates to remain under pressure as recordhigh vacancy rates and remote work dynamic make it difficult for office owners to increase rental rates that match inflation the flight to quality trend affecting the office sector should offset some of the pressure on the company in the near to medium term in the long term we expect the west coast market to ultimately recover as the supplydemand dynamic stabilizes we think that there will be enough demand for kilroy’s premium space offerings in the long run as we expect buoyant growth in the technology and life sciences industry on the west coast” “essex property trust is the most geographically focused multifamily reit with a portfolio of highquality multifamily buildings positioned entirely on the west coast los angeles san diego san francisco san jose and seattle these markets should experience strong longterm demographic trends like job growth income growth decreasing homeownership rates high relative cost of singlefamily housing and attractive urban centers that draw younger populations which allows the company to maintain high occupancies and drive rent growth above the us average we expect the company’s markets to see job and income growth above national average which should continue to support above average net operating income growth the company’s solid internal operating outlook should be supplemented by its small but opportunistic development pipeline to create value for shareholders “while essex’s portfolio focuses on markets with strong demand drivers the pandemic caused many millennials to consider moving to the suburbs either into suburban apartments or their own singlefamily homes though demand for new urban apartments has remained relatively resilient additionally the concentration of the essex portfolio in techoriented west coast markets leaves it exposed to the risk of a downturn and a resulting jobincome loss in the technology sector” “equity residential has repositioned its portfolio over the past decade to focus on owning and operating highquality multifamily buildings in urban coastal markets with demographics that allow the company to maintain high occupancies and drive strong rent growth the company has sold out of inland and southern markets and increased its operations in highgrowth core markets los angeles san diego san francisco washington dc new york boston and seattle these markets exhibit traits that create demand for apartments like job growth income growth decreasing homeownership rates high relative cost of singlefamily housing and attractive urban centers that draw younger people the company regularly recycles capital by selling noncore assets or exiting markets and using the proceeds for its development pipeline or acquisitions with strong growth prospects a strategy that has produced strong returns “however high inflation has driven revenue significantly higher as apartment leases are generally only a year long allowing equity residential to push rate growth that has matched inflation while we expect revenue growth to decelerate as inflation growth is brought under control and also expect a period of higher than normal expense growth the company’s funds from operations per share are already above prepandemic levels and we expect continued samestore growth to push funds from operations even higher” “avalonbay communities owns and operates highquality multifamily buildings in urban and suburban coastal markets with demographics that allow the company to maintain high occupancies and drive strong rent growth specifically new england new yorknew jersey the midatlantic southern california northern california and seattle these markets exhibit traits that create strong demand for apartments like job growth income growth decreasing homeownership rates high relative cost of singlefamily housing and attractive urban centers that draw younger people the company regularly recycles capital by selling noncore assets or exiting markets and using the proceeds for its development pipeline or acquisitions with promising growth prospects a sound strategy that continues to produce strong returns “we are cautious about avalonbay’s growth prospects given that new supply has been high in many of its markets the majority of new supply has been in the urban luxury end of the apartment market where avalonbay traditionally operates additionally the pandemic has caused many millennials to consider moves to the suburbs either into suburban apartments or their own singlefamily homes though demand for new urban apartments has remained relatively resilient avalonbay has historically created significant shareholder value through development though rising interest rates may cut into the expected return on new projects” “apartment income reit has significantly slimmed down the portfolio of multifamily buildings it owns over the past decade to just its best assets the company invests in metropolitan markets with solid demographic trends that allow the company to maintain high occupancies and pass along consistent rent increases demand for apartments depends on economic conditions in their markets like job growth income growth decreasing homeownership rates high relative cost of singlefamily housing and attractive urban centers apartment income’s portfolio is typically more suburban than its multifamily reit peers which has put it at a slight disadvantage over the past economic cycle but should favor growth in the company as millennials move from the urban centers out into the suburbs over the next few years the company regularly recycles capital by selling noncore assets or markets and uses the proceeds to fuel targeted acquisitions with strong growth prospects a strategy that has improved the company’s performance over the past few years “while supply has been more concentrated in the urban centers of apartment income’s core markets the suburbs are still affected by high supply we expect the current level of supply to be absorbed by demand growth and help moderate the market but recognize that increased new supply will pressure operations and asset values”