Real estate investment trusts, also known as REITs, typically offer high yields, making them appealing choices for income investors. The real estate stocks that Morningstar covers, as a group, look 12% undervalued as of Feb. 9, 2024.
REITs are interest-rate-sensitive, which means they tend to outperform the broad market when interest rates fall and underperform when interest rates rise. During the trailing one-year period, the Morningstar US Real Estate Index has returned negative 1.14%, while the Morningstar US Market Index has returned 24.28%.
9 Best REIT Stocks to Buy Now
The REIT stocks below all earn 5-star Morningstar Ratings, which means they are significantly undervalued according to Morningstar’s fair value estimates as of Feb. 9, 2024.
- Uniti Group UNIT
- Healthpeak Properties PEAK
- Kilroy Realty KRC
- Park Hotels PK
- Pebblebrook Hotel PEB
- Apartment Income AIRC
- Ventas VTR
- Equity Residential EQR
- Realty Income O
Here’s a little more about each of the best REITs to buy, including commentary from the Morningstar analysts who cover them. All data is as of Feb. 9, 2024.
Uniti Group
- Morningstar Price/Fair Value: 0.40
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 12.37%
- Industry: REIT—Specialty
Uniti Group is the least-expensive company on our list of the best REITs to buy, trading 60% below our fair value estimate of $12.00.
Uniti’s business is dominated by its triple-net leases, which results in little variability in operating results. The firm’s lease with Windstream makes up about 70% of total revenue and nearly 90% of EBITDA. Following Windstream’s bankruptcy in 2019, Uniti and Windstream renegotiated the lease, which has an initial term that runs through 2030. The renegotiation leaves Uniti with very stable and predictable financial results, but the firm has sought to grow and diversify.
Uniti’s strategy to reduce its reliance on Windstream has been twofold: find more sale-leaseback transactions like the deal with Windstream that spawned the company—where Uniti will buy a company’s physical network assets and then lease it back to them with a triple-net lease at attractive and certain rates of return—and add additional customers to the fiber network assets the firm buys or builds.
We like Uniti's original leasing business, where it engages in the sale-leaseback transactions, but it has had difficulty implementing them. In recent years, a depressed stock price and high debt levels in the wake of Windstream’s bankruptcy left the firm without financial flexibility to pursue these deals. However, we think a longer-lasting issue is an inability to find material deals like this. We don't think Uniti adds much value beyond providing capital, so we expect virtually any firm with access to cheap financing can compete. As such, we think suitors will compete on price, and finding sizable deals at attractive rates will be difficult.
With the dearth of sale-leaseback deals, diversification has come primarily via fiber construction and lease-ups, where Uniti leases dark and lit fiber and small cells to wireless carriers and other enterprises. We think Uniti is well positioned here and has an advantage of operating mostly in second- and third-tier cities, where we don’t think competition is quite as intense. However, the incremental leasing can’t move the needle the way the purchase of a huge lease could, leaving us to expect Windstream will continue to dominate Uniti’s business and growth will be minimal.
Healthpeak Properties
- Morningstar Price/Fair Value: 0.53
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 6.92%
- Industry: REIT—Healthcare Facilities
Healthpeak Properties is 47% undervalued relative to our $32.50 fair value estimate. This cheap REIT stock focuses on healthcare facilities and offers a 6.92% dividend yield.
The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.
Given the significant challenges that the coronavirus presented to the senior housing industry, Healthpeak made the strategic decision in 2020 to dispose of most of the company’s senior housing assets in multiple transactions for around $4 billion in total proceeds. As a result, Healthpeak’s life science and medical office portfolios are now prominently featured in the company’s portfolio as the proceeds from the senior housing sales were reinvested into these two sectors. Healthpeak has high-quality assets in top markets that attract credit-grade tenants in both segments, so we believe it makes sense to strategically focus the company on the segments where it has an advantage. Despite the possibility of further changes to the ACA, we think any changes will still result in a coordinated value- and outcome-based system that will provide Healthpeak’s current portfolio with strong tailwinds.
Kilroy Realty
- Morningstar Price/Fair Value: 0.55
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 6.22%
- Industry: REIT—Office
Kilroy Realty is 45% undervalued relative to our $63.00 fair value estimate. This REIT stock operates in the office industry and offers a 6.22% dividend yield.
Kilroy is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns 119 properties consisting of approximately 16 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.
Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term maintainable growth by developing and owning the highest-quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers.
Economic uncertainty emanating from pandemic recovery and the remote work dynamic created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 50% of the prepandemic level. The vacancy rates in the Los Angeles and San Francisco office markets were recorded at 22.4% and 24.1%, respectively, in the fourth quarter of 2022. The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains materially negative as of fourth-quarter 2022, and rental growth figures are disappointing especially given the inflationary environment.
Having said this, we are seeing an increasing number of companies requiring their employees to return to the office. In the long run, we believe that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.
Park Hotels
- Morningstar Price/Fair Value: 0.57
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 9.08%
- Industry: REIT — Hotel & Motel
Park Hotels operates in the hotel and motel industry. This REIT stock is 43% undervalued relative to our fair value estimate of $26.50 and offers a 9.08% dividend yield.
Park Hotels & Resorts is the second-largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all its international hotels and 23 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complementary portfolio of 18 high-quality, upper-upscale hotels that should help to diversify Park’s hotel brands to include Marriott, Hyatt, and IHG hotels.
In the short term, the coronavirus hit the operating results of Park's hotels significantly with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations across the country allowed leisure travel to recover quickly, leading to significant growth in 2021 and 2022. We think the company should continue to see strong growth as business and group travel continue to recover slowly with Park eventually almost returning to 2019 levels by 2025 in our estimate.
However, the hotel industry will continue to face several long-term headwinds. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing Park from pushing rate increases. Last, while the shadow supply created by Airbnb doesn’t compete directly with Park on most nights, it does limit Park’s ability to push rates on nights where it would typically generate its highest profits.
Still, we think Park does have some opportunities to create value. We believe that management should be able to drive operating margins higher as occupancy continues to recover from the pandemic. The Chesapeake acquisition should provide an additional source of growth as the company drives higher operating efficiencies across this new portfolio. We also think the pandemic created additional opportunistic ways for Park to increase margins across the portfolio.
Pebblebrook Hotel
- Morningstar Price/Fair Value: 0.59
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 0.25%
- Industry: REIT—Hotel & Motel
Pebblebrook Hotel, our second REIT on the list operating in the hotel and motel industry, is 41% undervalued; we think it’s worth $26.50.
Pebblebrook Hotel Trust is the largest U.S. lodging REIT focused on owning independent and boutique hotels. After Pebblebrook merged with LaSalle Hotel Properties in December 2018, the company owns 47 upper-upscale hotels, with more than 12,100 rooms located primarily in urban gateway markets. Historically, Pebblebrook’s combined portfolio has had a higher revenue per available room price point and EBITDA margin than its hotel REIT peers.
The merger with LaSalle provides Pebblebrook with some new avenues to create value for shareholders. The company doubled in size while taking on only a portion of the general and administrative costs, making the combined company more efficient. Pebblebrook CEO Jon Bortz previously ran LaSalle and acquired many of the hotels in that portfolio. His knowledge of those hotels combined with management's demonstrated ability to maximize margins should allow him to implement cost-saving initiatives that drive up margins. Additionally, management has begun an extensive renovation program across both the LaSalle portfolio and the legacy portfolio that will drive EBITDA gains over time.
The coronavirus outbreak significantly affected operating results for Pebblebrook's hotels, with high-double-digit 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 continue to slowly improve through 2025 in our base-case scenario.
However, several factors will remain headwinds for hotels over the long term. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing hotels from pushing rate increases even though it is nearing full occupancy on many nights. Last, while the shadow supply created by Airbnb doesn’t directly compete most nights, it does limit Pebblebrook's ability to push rates on nights when it would have typically generated its highest profits.
Apartment Income
- Morningstar Price/Fair Value: 0.63
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 5.74%
- Industry: REIT—Residential
Apartment Income operates in the residential REIT industry. This cheap REIT stock trades 37% below our fair value estimate of $50.00.
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 single-family 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.
Apartment Income has significantly streamlined its portfolio and strategy over the past decade. While the company has decreased its portfolio from over 300 properties at the end of 2008 to 73 properties in the current portfolio, the company owns approximately the same number of assets over that time frame in the eight markets it currently considers to be its core markets. The company’s exit from markets with lower growth prospects has increased the portfolio’s expected average growth. The company completed the sale of the last of its affordable living and asset management businesses in 2018, segments with limited growth prospects that the company has been trying to exit for years. In 2020, Apartment Income spun off its development pipeline and lease-up portfolio into its own company so that the remaining company could focus on the highest-quality assets. These efforts have brought Apartment Income’s portfolio closer to its peers in terms of both asset quality and market exposure. While the company still has a differentiated portfolio from its peers, we expect it to have similar internal and external growth opportunities.
Ventas
- Morningstar Price/Fair Value: 0.63
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 3.95%
- Industry: REIT—Healthcare Facilities
This undervalued REIT operates in the healthcare facilities industry. Ventas yields 3.95% and trades 37% below our fair value estimate.
The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.
In our view, Ventas will benefit from these industry tailwinds due to its portfolio of high-quality assets connected to top operators in the senior housing, medical office buildings, life science, and hospital segments. Ventas has made a bet on the potential future of healthcare delivery by partnering with Ardent Health Services, an acute-care hospital owner and operator, as well as with Wexford Science & Technology, a life science operator and developer. 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 coronavirus was a major challenge for the senior housing industry as the senior population was one of the worst hit by the virus. Even a few cases led to quarantines of entire facilities, which caused dramatic declines in occupancy early in the pandemic. However, we remain optimistic about the sector’s longer-term prospects, given that the industry has steadily recovered over the past two years, supply will likely remain below the historical average in the coming years, and the demographic boon will create a massive spike in demand for senior housing. We also like Ventas’ acquisition of New Senior Investment Group to expand its exposure to the sector ahead of what we believe will be a decade of strong growth.
Equity Residential
- Morningstar Price/Fair Value: 0.68
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 4.50%
- Industry: REIT—Residential
Landing among the best REITs to buy, Equity Residential yields 4.50%. Units of this residential REIT look 32% undervalued compared with our $87 fair value estimate.
Equity Residential has repositioned its portfolio over the past decade to focus on owning and operating high-quality 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 high-growth core markets: Los Angeles, San Diego, San Francisco, Washington, D.C., 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 single-family 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, a strategy that has produced strong returns.
While Equity Residential has repositioned its portfolio into markets with strong demand drivers, we are cautious on its long-term growth prospects, given that many markets have historically seen high supply growth. The urban, luxury end of the apartment market where Equity Residential operates has seen the highest amount of new supply, competing directly with the company's portfolio. Additionally, the pandemic caused many millennials to consider moves to the suburbs, either into suburban apartments or their own single-family homes, though demand for new urban apartments has remained resilient. Equity Residential has created significant shareholder value through development, though rising interest rates have cut into the expected return on new projects.
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. Revenue growth has decelerated in 2023 from the 2022 highs as inflation growth has come down but is still well above the historical average while expense growth also remains elevated. As a result, the company’s funds from operations per share are already above prepandemic levels, and we expect continued same-store growth to push FFO even higher.
Realty Income
- Morningstar Price/Fair Value: 0.69
- Morningstar Uncertainty Rating: Low
- Morningstar Economic Moat Rating: None
- Forward Dividend Yield: 5.83%
- Industry: REIT—Retail
Realty Income rounds out our list of the best REITs to buy. Although it is the most expensive REIT here, Realty Income still looks undervalued as it trades 31% below our fair value estimate of $76.00.
Realty Income is the largest triple-net REIT in the United States, with nearly 13,300 properties that mainly house retail tenants. The company describes itself as “The Monthly Dividend Company,” and its line of business and operating metrics make its dividend one of the most stable sources of income for investors. Even though over 80% of Realty Income’s tenants are in retail, most are focused on defensive segments, with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant and requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long term, frequently 15 years with additional extension options, which provides Realty Income a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors.
Stability comes at the cost of economic profit, however. The lease terms include very low annual rent increases around 1%, which helps keep the coverage ratio high but severely limits internal growth for the company. Therefore, to grow, Realty Income must rely on acquisitions. The company has executed nearly $36 billion in acquisitions over the past decade at average cap rates around 6%. Given the access to cheap debt during this time, it has created a lot of value. However, increased competition has lowered cap rates, and the recent rise in interest rates has started to squeeze the company's spread and its ability to create value. We remain concerned that at some point, the valve for creating value will shut off and Realty Income will be left with just a low internal growth story.
The 10 Undervalued Dividend Stocks for 2024
How to Find More of the Best REITs to Buy
Investors who’d like to extend their search for the best REITs can do the following:
- Review Morningstar’s comprehensive list of real estate stocks to investigate further.
- Use the Morningstar Investor screener to build a shortlist of REITs to research and watch.
- Read the latest news about notable REITs from Morningstar’s lead real estate analyst Kevin Brown.
The author or authors own shares in one or more securities mentioned in this article.Find out about Morningstar’s editorial policies.
