10 Cheap REITs with Huge Upside

In this article, we discuss 10 cheap REITs with huge upside.

The most significant factor that affected REIT performance in 2022 was the sudden and significant rise in interest rates. This increase made it more costly for REITs to obtain new debt or refinance existing debt obligations, as well as making potential portfolio acquisitions more expensive. As a result of this dynamic, a vicious cycle was triggered, with rising financing costs leading to lower valuations for REITs, which then led to even higher financing costs. For years, the demand for housing has been exceeding its supply. With an increase in mortgage rates and high home prices, renting a home has become a more affordable option for many individuals and families. As a result of rising interest rates since the beginning of 2022, the monthly mortgage payments for a typical prospective homebuyer have increased by around 60%. Currently, the difference in affordability between buying and renting a home is historically significant.

According to Fidelity, real estate investment trusts (REITs) have had a challenging year in terms of performance, but there is a possibility of stabilization in 2023 if the rate at which interest rates increase slows down. With the current situation in the housing market, REITs that focus on renting out residential apartments and homes are expected to have the strongest performance.

As per Nareit, towards the end of 2022, the overall property fundamentals remained stable, but there were some indications of a decline heading into 2023. The industrial, retail, and apartment properties maintained their high occupancy rates, which were higher than their levels before the pandemic. On the other hand, office occupancy rates continued to decline, dropping by almost 3% from their average in 2019. The four-quarter rent growth rates were positive for the industrial, retail, and apartment sectors, but office sectors were striving to maintain positive rent gains. Due to high interest rates and debt costs, the volume of commercial real estate transactions has decreased. The combination of these factors resulted in a decline of REIT capital raising in the third quarter of 2022, and it has reached its lowest level since 2009.

Although it is commonly understood that past performance may not predict future results, examining the historical total returns of public and private real estate, as well as equity market total returns, before, during, and after economic recessions may provide insight into what we could anticipate in 2023 and beyond. It is worth noting that economic downturns do not necessarily lead to negative real estate performance. Additionally, REITs have typically been well-positioned to benefit from economic recoveries. Nariet’s analysis of the last six recessions demonstrates that, on average, REITs underperformed private real estate in the four quarters preceding a recession, outperformed private real estate during a recession, outperformed private real estate in the four quarters following a recession, and outperformed their equity market counterparts before, during, and after recessions. 

Some of the top REIT stocks like American Tower Corporation (NYSE:AMT), STAG Industrial, Inc. (NYSE:STAG), and Realty Income Corporation (NYSE:O) are popular among elite hedge funds. However, we discuss cheap REITs with significant upside potential in this article. 

Our Methodology 

To determine the top cheap REIT stocks, we focused on REITs with P/E ratios of less than 15. We narrowed down our selection to REIT stocks that had the highest upside potential based on average analyst price targets. We have ranked our picks in ascending order of their average upside potential, as of March 31. 

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Cheap REITs with Huge Upside

10. Ares Commercial Real Estate Corporation (NYSE:ACRE)

Number of Hedge Fund Holders: 6

Average Upside Potential Based on Analyst Ratings: 41.10%

Average Analyst Price Target: $13.08

Ares Commercial Real Estate Corporation (NYSE:ACRE) is a specialty finance firm that funds and invests in commercial real estate loans and associated investments within the United States. The company offers various financing options including senior mortgage loans, subordinate debt products, mezzanine loans, real estate preferred equity, and other CRE investments such as commercial mortgage-backed securities. Ares Commercial Real Estate Corporation (NYSE:ACRE) was established in 2011 and is headquartered in New York. 

On February 15, Ares Commercial Real Estate Corporation (NYSE:ACRE) reported a Q4 non-GAAP EPS of $0.44 and a revenue of $30.4 million, outperforming Wall Street estimates by $0.07 and $3.04 million, respectively. On February 15, Ares Commercial Real Estate Corporation (NYSE:ACRE) declared a quarterly dividend of $0.33 per share, in line with previous. The dividend is payable on April 18, to shareholders of record on March 31. The company also announced a supplemental cash dividend of $0.02.

Keefe Bruyette downgraded Ares Commercial Real Estate Corporation (NYSE:ACRE) to Market Perform from Outperform with a $12.50 price target. This is due to their apprehensive outlook regarding commercial real estate credit, as well as the fact that the company has a high level of exposure to office properties.

According to Insider Monkey’s fourth quarter database, 6 hedge funds were bullish on Ares Commercial Real Estate Corporation (NYSE:ACRE), compared to 7 funds in the prior quarter. Dmitry Balyasny’s Balyasny Asset Management is the largest stakeholder of the company, with 412,530 shares worth $4.2 million. 

Like American Tower Corporation (NYSE:AMT), STAG Industrial, Inc. (NYSE:STAG), and Realty Income Corporation (NYSE:O), Ares Commercial Real Estate Corporation (NYSE:ACRE) is one of the best REIT stocks to invest in. 

9. Hersha Hospitality Trust (NYSE:HT)

Number of Hedge Fund Holders: 18

Average Upside Potential Based on Analyst Ratings: 41.88%

Average Analyst Price Target: $10.38

Hersha Hospitality Trust (NYSE:HT) is a real estate investment trust that specializes in the hospitality industry. It is self-advised and owns and manages upscale and lifestyle hotels in prime urban gateway markets and resort destinations. The company’s properties are situated in key locations such as New York, Washington, DC, Boston, Philadelphia, South Florida, and selected markets on the West Coast. It is one of the best cheap REITs stocks to invest in. 

On March 10, Hersha Hospitality Trust (NYSE:HT) declared a quarterly dividend of $0.05 per share, in line with previous. The dividend is payable on April 17, to shareholders of record on March 31. 

Anthony Powell, an analyst at Barclays, decreased the firm’s price target on Hersha Hospitality Trust (NYSE:HT) to $9 from $10 and maintained an Underweight rating on the company’s shares on January 10. Powell anticipates “cautious optimism during earnings” for the U.S. real estate investment trusts due to strong December lodging revenue per available room (RevPAR) numbers.

According to Insider Monkey’s fourth quarter database, 18 hedge funds were long Hersha Hospitality Trust (NYSE:HT), compared to 20 funds in the prior quarter. Thomas Soviero’s Soviero Asset Management is the biggest position holder in the company, with 660,000 shares worth $5.6 million. 

8. Arbor Realty Trust, Inc. (NYSE:ABR)

Number of Hedge Fund Holders: 17

Average Upside Potential Based on Analyst Ratings: 44.53%

Average Analyst Price Target: $17.13

Arbor Realty Trust, Inc. (NYSE:ABR) is a New York-based REIT that invests in a diversified portfolio of structured finance assets in the multifamily, single-family rental, and commercial real estate markets in the United States. The company operates via two segments – Structured Business and Agency Business. It is one of the best cheap REIT stocks to monitor. 

On March 20, Arbor Realty Trust, Inc. (NYSE:ABR) declared that its board has sanctioned a program to repurchase shares, which allows the company to buy back a maximum of $50 million worth of its common stock that is currently outstanding. Additionally, a subsidiary of Arbor Realty Trust, Inc. (NYSE:ABR) concluded a placement of $95 million in notes.

According to Insider Monkey’s fourth quarter database, 17 hedge funds were bullish on Arbor Realty Trust, Inc. (NYSE:ABR), compared to 13 funds in the prior quarter. Dmitry Balyasny’s Balyasny Asset Management is the largest stakeholder of the company, with 2 million shares worth $26.5 million. 

7. Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI)

Number of Hedge Fund Holders: 1

Average Upside Potential Based on Analyst Ratings: 53.32% 

Average Analyst Price Target: $18.80

Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) is involved in commercial real estate finance. The company arranges, designs, and puts money into initial mortgage loans and other structured funding options that are backed by commercial real estate assets. One of its services includes providing senior loans to licensed cannabis industry operators. The company has chosen to be recognized as a real estate investment trust (REIT), which exempts it from paying federal corporate income taxes as long as it distributes at least 90% of its taxable income to its shareholders. The company was founded in 2021 and is headquartered in Illinois, Chicago. It is one of the best cheap REIT stocks to invest in. 

On March 15, Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) declared a $0.47 per share quarterly dividend, in line with previous. The dividend is payable on April 14, to shareholders of record on March 31. 

According to Insider Monkey’s fourth quarter database, Jim Simons’ Renaissance Technologies held a stake in Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI), comprising 44,421 shares worth $669,000. 

6. Brandywine Realty Trust (NYSE:BDN)

Number of Hedge Fund Holders: 22

Average Upside Potential Based on Analyst Ratings: 58.02%

Average Analyst Price Target: $6.05

Brandywine Realty Trust (NYSE:BDN) is a major real estate company in the US. The company is a full-service, integrated real estate provider, with a primary focus on the Philadelphia, Austin, and Washington markets. As a real estate investment trust, Brandywine Realty Trust (NYSE:BDN) is involved in property ownership, development, leasing, and management of urban, town center, and transit-oriented assets. On February 16, the company declared a quarterly dividend of $0.19 per share, in line with previous. The dividend is payable on April 19, to shareholders of record on April 5. 

On March 27, Steve Sakwa, an analyst at Evercore ISI, decreased his price target for Brandywine Realty Trust (NYSE:BDN) to $6 from $7 and maintained an In Line rating on the stock. Evercore’s recent conversations with investors have shown that their top concern is the banking system’s stability and the availability of debt. While REITs have access to the unsecured bond market, they are not equipped to handle significant property buybacks, so “pretend and extend” may be the strategy, the analyst wrote in a research note to investors. 

According to Insider Monkey’s fourth quarter database, 22 hedge funds were long Brandywine Realty Trust (NYSE:BDN), compared to 20 funds in the prior quarter. Cliff Asness’ AQR Capital Management is a significant position holder in the company, with 1.68 million shares worth $10.35 million. 

In addition to American Tower Corporation (NYSE:AMT), STAG Industrial, Inc. (NYSE:STAG), and Realty Income Corporation (NYSE:O), Brandywine Realty Trust (NYSE:BDN) is one of the best REIT stocks to invest in.

5. Medical Properties Trust, Inc. (NYSE:MPW)

Number of Hedge Fund Holders: 28

Average Upside Potential Based on Analyst Ratings: 60.45% 

Average Analyst Price Target: $12.75

Medical Properties Trust, Inc. (NYSE:MPW) is a real estate investment trust that is self-managed and was established in 2003. Its main objective is to purchase and construct net-leased hospital facilities. Medical Properties Trust, Inc. (NYSE:MPW)’s financing strategy assists with acquisitions and recapitalizations and enables hospital operators to access the value of their real estate properties to finance improvements in facilities, technology upgrades, and other operational investments. It is one of the best cheap REITs stocks to watch. 

According to Truist analyst Michael Lewis, the future of Medical Properties Trust, Inc. (NYSE:MPW) is uncertain, which led him to revise the company’s price target from $14 to $8 and maintain a Hold rating on its shares on March 29. The analyst’s cautious outlook on the real estate investment trust is based on factors such as potential rent reductions, new investments, cost of capital, de-levering activity, and a possible dividend cut. 

According to Insider Monkey’s fourth quarter database, 28 hedge funds were bullish on Medical Properties Trust, Inc. (NYSE:MPW), compared to 23 funds in the earlier quarter. Dmitry Balyasny’s Balyasny Asset Management is the largest stakeholder of the company, with 7.5 million shares worth $84.3 million.

4. Piedmont Office Realty Trust, Inc. (NYSE:PDM)

Number of Hedge Fund Holders: 19

Average Upside Potential Based on Analyst Ratings: 61.97%

Average Analyst Price Target: $12.00

Piedmont Office Realty Trust, Inc. (NYSE:PDM) is a real estate investment trust that owns, manages, develops, redevelops, and operates Class A office properties in seven major Eastern U.S. office markets, with the majority of its revenue coming from the Sunbelt. It is one of the top cheap REIT stocks to monitor. 

At the end of June 2022, Truist analyst Michael Lewis maintained a Buy rating on Piedmont Office Realty Trust, Inc. (NYSE:PDM) but lowered the firm’s price target on the shares to $17 from $21 as part of a broader research note on Office REITs that assumes higher debt costs and a slower assumed occupancy recovery. 

According to Insider Monkey’s fourth quarter database, 19 hedge funds were bullish on Piedmont Office Realty Trust, Inc. (NYSE:PDM), compared to 16 funds in the preceding quarter. GLG Partners held the largest position in the company, comprising approximately 2 million shares worth $18.2 million. 

3. Safehold Inc. (NYSE:SAFE)

Number of Hedge Fund Holders: 10

Average Upside Potential Based on Analyst Ratings: 67.90% 

Average Analyst Price Target: $21.00

Safehold Inc. (NYSE:SAFE) is transforming real estate ownership by offering a ground lease capital solution that enables property owners to maximize the value of their land. By utilizing this approach, the company assists owners of high-quality properties in major markets throughout the United States, such as multifamily, office, industrial, hospitality, and mixed-use properties, to generate higher returns with less risk. Safehold is structured as a real estate investment trust. Safehold Inc. (NYSE:SAFE) is one of the best cheap REITs to watch. On March 16, Exane BNP Paribas initiated coverage of Safehold with an Outperform rating.

On March 30, iStar (NYSE:STAR) announced that it will conduct a reverse stock split, which involves combining each outstanding share of its common stock into 0.160 shares. This reverse split of iStar’s common stock will take place just before the iStar and Safehold Inc. (NYSE:SAFE) merger becomes effective.

According to Insider Monkey’s fourth quarter database, 10 hedge funds were long Safehold Inc. (NYSE:SAFE), compared to 11 funds in the prior quarter. John Khoury’s Long Pond Capital held the largest stake in the company, comprising 913,523 shares worth $26 million. 

Aristotle Small Cap Equity Strategy made the following comment about Safehold Inc. (NYSE:SAFE) in its Q4 2022 investor letter:

Safehold Inc. (NYSE:SAFE), is a real estate investment trust (REIT) focused on acquiring, owning, managing and capitalizing ground leases. We inherited shares of Safehold via a special dividend from existing holding iStar, which holds a meaningful stake in Safehold. We maintain our shares ahead of the anticipated business combination between the two entities, which will create the only self‐managed, pure‐play ground lease company in the public markets.”

2. AFC Gamma, Inc. (NASDAQ:AFCG)

Number of Hedge Fund Holders: 4

Average Upside Potential Based on Analyst Ratings: 70.69% 

Average Analyst Price Target: $20.81

AFC Gamma, Inc. (NASDAQ:AFCG) is involved in the creation, arrangement, approval, and funding of loans and debt securities for established businesses in the cannabis industry operating in states where medical and/or adult use of cannabis is legal. It is one of the top cheap REIT stocks to invest in. On March 29, AFC Gamma, Inc. (NASDAQ:AFCG) declared a $0.56 per share quarterly dividend, in line with previous. The dividend is payable on April 14, to shareholders of record on March 31. 

On March 8, TD Cowen maintained an Outperform rating on AFC Gamma, Inc. (NASDAQ:AFCG) but decreased the target price on the stock from $22 to $21. The analyst noted that due to a slower environment for lending in the cannabis industry, the company is now focusing on investing its capital into commercial real estate loans, with the goal of achieving a 50-50 split between CRE and cannabis by the end of the year. This pivot is seen as a positive move, as the credit quality of CRE loans is higher compared to those in the cannabis industry, the analyst wrote in a research note. 

According to Insider Monkey’s fourth quarter database, 4 hedge funds were bullish on AFC Gamma, Inc. (NASDAQ:AFCG), compared to 5 funds in the prior quarter. D E Shaw is the biggest position holder in the company, with 108,183 shares worth $1.70 million. 

1. Innovative Industrial Properties, Inc. (NYSE:IIPR)

Number of Hedge Fund Holders: 14

Average Upside Potential Based on Analyst Ratings: 86.26% 

Average Analyst Price Target: $138.80

Innovative Industrial Properties, Inc. (NYSE:IIPR) is a company based in Maryland that specializes in acquiring, owning, and managing properties that are leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. The company has chosen to be taxed as a real estate investment trust since the year ended December 31, 2017. On March 15, Innovative Industrial Properties, Inc. (NYSE:IIPR) declared a $1.80 per share quarterly dividend, in line with previous. The dividend is payable on April 14, to shareholders of record on March 31. 

On March 1, Eric Des Lauriers, an analyst at Craig-Hallum, decreased the company’s price target for Innovative Industrial Properties, Inc. (NYSE:IIPR) from $140 to $125 due to challenges the company is currently facing, including an influx of committed capital that has exceeded initial expectations. Despite this, the analyst still maintained a Buy rating on the shares.

According to Insider Monkey’s fourth quarter database, 14 hedge funds were long Innovative Industrial Properties, Inc. (NYSE:IIPR), compared to 12 funds in the prior quarter. Stuart J. Zimmer’s Zimmer Partners is the largest stakeholder of the company, with 2.4 million shares worth $247.7 million. 

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Disclosure: None. 10 Cheap REITs with Huge Upside is originally published on Insider Monkey.