Is real estate really the 'best' investment?: 7 undervalued REITs

James Dennin, Kapitall: Buying real estate can secure fat returns, but it also poses greater risks. Are diversified REITs the answer? 

An interesting article in  Vox this morning about the virtues of investing in real estate poses the controversial question "Is buying a house a better investment than buying stocks?"

Their answer, quite simply, is "only if you're rich."

That's because a lot of real estate in the world really does offer higher returns than you can get pretty much anywhere else. London real estate for instance, has grown in value 5.3% in the last  three months alone.

Read more from Kapitall: What are some of the virtues of dividend-free value stocks?

Compounded that's a more than respectable 20% for the year, almost double what the S&P usually returns over that same period. Buying real estate also requires less expertise than picking stocks (assuming you have enough capital to buy valuable real estate in the first place).

On the flip side, of course, investors are hard pressed to diversify risk in real estate. An S&P index fund can track dozens of companies – if not more – with a lot less capital. For instance, the largest SPDR S&P 500 ETF (SPYtracks 501 companies in all the major industries. You get can a piece of all 501 for about $180 bucks a share. 

Your house, on the other hand, can become worthless overnight in the event of a natural disastor, or if the neighborhood takes a turn for the worse. In fact, not counting tax incentives, real estate can be a pretty risky proposition. 

Real estate investment trusts (REITs) offer one way to capture the returns of real estate investing while also adding a degree of diversification. They buy and maintain real estate assets and distribute profits to shareholders through dividends, which are often quite high. 

To hedge the risk, we wanted to look for larger, diversified REITs that were already trading at a discount. We looked for companies trading below their Graham Number, indicating that their trading price doesn't reflect the book value of the company. 

That left us with 7 undervalued REITs on our list. 

Click on the interactive chart to view data over time. 

 Are these REITs undervalued? Do you think real estate is a safe investment? Use the list below to begin your own analysis.

1. Arbor Realty Trust Inc. ( ABR): Operates as a real estate investment trust (REIT). Market cap at $294.24M, most recent closing price at $6.78.

Diluted TTM earnings per share at 0.39, and a MRQ book value per share value at 7.53, implies a Graham Number fair value = sqrt(22.5*0.39*7.53) = $8.13.

Based on the stock's price at $7.01, this implies a potential upside of 15.96% from current levels.  

 

2. Apollo Commercial Real Estate Finance, Inc. ( ARI): Operates as a commercial real estate finance company in the United States. Market cap at $611.89M, most recent closing price at $16.59.

Diluted TTM earnings per share at 1.26, and a MRQ book value per share value at 18.51, implies a Graham Number fair value = sqrt(22.5*1.26*18.51) = $22.91.

Based on the stock's price at $17.03, this implies a potential upside of 34.51% from current levels.  

 

 

3. Capstead Mortgage Corp. ( CMO): Operates as a self-managed real estate investment trust in Dallas, Texas. Market cap at $1.22B, most recent closing price at $12.76.

Diluted TTM earnings per share at 0.93, and a MRQ book value per share value at 12.53, implies a Graham Number fair value = sqrt(22.5*0.93*12.53) = $16.19.

Based on the stock's price at $12.72, this implies a potential upside of 27.3% from current levels.  

 

 

4. Invesco Mortgage Capital Inc. ( IVR): Operates as a mortgage real estate investment trust. Market cap at $2.24B, most recent closing price at $16.60.

Diluted TTM earnings per share at 0.99, and a MRQ book value per share value at 18, implies a Graham Number fair value = sqrt(22.5*0.99*18) = $20.02.

Based on the stock's price at $16.58, this implies a potential upside of 20.77% from current levels.

 

 

5. Newcastle Investment Corp. ( NCT): Operates as a real estate investment and finance company that invests in and manages a portfolio consisting primarily of real estate securities. Market cap at $1.42B, most recent closing price at $4.84.

Diluted TTM earnings per share at 0.52, and a MRQ book value per share value at 3.14, implies a Graham Number fair value = sqrt(22.5*0.52*3.14) = $6.06.

Based on the stock's price at $4.58, this implies a potential upside of 32.34% from current levels.

 

 

6. Redwood Trust Inc. ( RWT): Redwood Trust, Inc., a financial institution, together with its subsidiaries, invests in, finances, and manages residential and commercial real estate loans and securities. Market cap at $1.6B, most recent closing price at $19.51.

Diluted TTM earnings per share at 1.94, and a MRQ book value per share value at 15.1, implies a Graham Number fair value = sqrt(22.5*1.94*15.1) = $25.67.

Based on the stock's price at $20.85, this implies a potential upside of 23.13% from current levels. 

 

 

7. Starwood Property Trust, Inc. ( STWD): Focuses on originating, investing in, financing, and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments. Market cap at $4.13B, most recent closing price at $24.06.

Diluted TTM earnings per share at 1.82, and a MRQ book value per share value at 21.91, implies a Graham Number fair value = sqrt(22.5*1.82*21.91) = $29.95.

Based on the stock's price at $23.2, this implies a potential upside of 29.11% from current levels.  

(List compiled by James Dennin, a Kapitall Writer. Monthly returns sourced from Zacks Investment Research. All other data sourced from Finviz.)

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