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Which Are Morningstar's 10 Most Undervalued REITs?

Real estate investment trusts have rallied over the past eight weeks, but a prominent REIT index remains down 12% year to date.
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While real estate investment trusts have rallied over the past eight weeks, the FTSE Nareit Equity REITs index remains down 12% in 2022 through Aug. 10.

Rising interest rates have dented REITs, which frequently borrow to finance real estate purchases, and higher yields make bonds more competitive against REITs.

Recession fears also have hurt real estate investments this year.

The decline in REITs may have you wondering whether any bargains are hiding in the sector. 

-Investment-research firm Morningstar sees plenty of them.

It put together a list of the 10 most undervalued REITs in its REIT Index. Valuations are measured against Morningstar analysts’ fair-value estimate for each REIT.

Here is the list as of Aug. 5, starting with the most undervalued.

  1. Macerich  (MAC) , a shopping center REIT. Price to fair value ratio: 0.36, yield: 5.78%
  2. Simon Property Group  (SPG) , a shopping center REIT. Price to fair value ratio: 0.67, yield: 6.57%
  3. Ventas  (VTR) , a health-care REIT. Price to fair value ratio: 0.71, yield: 3.68%
  4. Healthpeak Properties  (PEAK) , a health-care REIT. Price to fair value ratio: 0.74, yield: 4.53%
  5. Kimco Realty  (KIM) , a shopping center REIT. Price to fair value ratio: 0.81, yield: 4.11%
  6. Welltower  (WELL) , a health-care REIT. Price to fair value ratio: 0.83, yield: 3.02%
  7. Equity Residential  (EQR) , an apartment REIT. Price to fair value ratio: 0.85, yield: 3.26%
  8. Essex Property Trust  (ESS) , an apartment REIT. Price to fair value ratio: 0.87, yield: 3.16%
  9. AvalonBay Communities  (AVB) , an apartment REIT. Price to fair value ratio: 0.88, yield: 3.1%
  10. Invitation Homes  (INVH) , a single-family rental-home REIT. Price to fair value ratio: 0.9, yield: 2.32%.

Morningstar’s Take on Macerich

“Macerich has successfully repositioned the company over the past decade as a true owner and operator of Class A regional malls,” Morningstar analyst Kevin Brown wrote in a commentary.

“Over the past 10 years, the company has sold over $4 billion in mostly lower-quality assets … and recycled the capital into acquiring new Class A malls.

“As a result, the company's portfolio should produce higher tenant sales productivity, occupancy levels, and rent.”

Morningstar’s Take on Ventas

“Ventas has made a bet on the potential future of health-care delivery by partnering with Ardent Health Services, an acute-care-hospital owner and operator, and partnering with Wexford, a life science operator and developer,” Brown wrote in a commentary.

“While the ultimate scope, scale, and success of these strategies remain to be seen, Ardent and Wexford give Ventas added platforms for consolidation, as owners and operators potentially seek an efficient capital partner that can help provide an integrated healthcare infrastructure.”

The author of this story owns shares of Ventas.