In this article, we will analyze the state of US real estate and then discuss the 10 cheap REITs with huge upside.
How is the US Real Estate Market Unfolding?
In the week ending October 24, the average rate on a standard, 30-year fixed mortgage was 6.54%, hitting its highest level since early August. Previously, the mortgage rates dropped to their lowest since early February 2023 after the Fed made its first big rate cut. However, home buying activity hasn’t accelerated as such. Sales of previously owned homes accounting for the majority of the market declined 1% in September from the preceding month. On the contrary, new home sales rose 4.1% in September.
While the slow demand could be attributed to lower rates coming too late for many homebuyers as they tend to buy and sell homes in the spring season, some are hoping for the rates to fall even lower as they look forward to the Fed’s upcoming rate cuts. At the same time, a chronic shortage of inventory is harming the market, with home prices rising in September for the 15th consecutive month.
On October 25, Robert Reffkin, Compass CEO, appeared on CNBC to discuss the housing market. He mentioned that the mortgage rates although on the rise, are a lot better than what they were one year ago at 8.2%. Since consumers react more to the change in the mortgage rate than the absolute rate itself, pending home sales are up 10% year-over-year.
In another interview with CNBC, Alan Ratner, Zelman & Associates managing director, emphasized that the rise in the mortgage rates is the equivalent of a 6% increase in home payment prices. While the resale home market remains constrained due to a lack of inventory, the new home market is showing solid activity. In the prevailing conditions, builders have a competitive advantage over the resale market as they are buying mortgage rates down. However, rate buydowns and other incentives are pressuring gross margins while the opportunity to raise prices or lower incentives to drive the margin back up remains low amidst severe affordability issues.
Is the Commercial Real Estate Sector Recovering?
Lower interest rates are expected to benefit rate-sensitive sectors such as commercial real estate by bringing positive momentum. According to Wells Fargo analysts, the Fed’s shift in policy is the most notable green shoot for the commercial real estate market. Additionally, Alan Todd, head of commercial mortgage-backed security strategy at Bank of America, deems the primary impact of interest rate cuts psychological. Hence, a sense of stability would enable borrowers to get off the sideline and start to transact as the Fed continues its rate cutting.
On September 23, Willy Walker, Walker & Dunlop chairman and CEO, joined CNBC’s ‘Squawk on the Street’. He mentioned how the refinancing and sales volumes are picking up as the sentiment around commercial real estate improves. Furthermore, the second quarter of 2024 witnessed the overall transaction volumes recording their first quarterly increase since 2022. Over $40 billion in transactions took place in the quarter which marked a 13.9% quarter-over-quarter increase.
The multifamily sector is demonstrating strength as well with net absorption totaling 126,600 units in Q2, the sixth-highest Q2 total in more than 20 years. Additionally, the overall multifamily vacancy rate remained unchanged at 5.5% in the quarter after two years of quarterly increases. With demand outpacing new deliveries, the vacancy rate should start to fall toward its long-run average of 5% in subsequent quarters as reported by CBRE.
While the aforementioned dynamics seem to lay the foundation for commercial real estate recovery, the office sector still remains stressed and plagued with challenges. Although the sector has shown some improvement in Q2 with the office net absorption turning positive for the first time since 2022, problems such as rising vacancies and supply outpacing demand continue to persist. Hence, the office sector despite showing some progress, still has a long way to go.
With that being said, let’s move to the 10 cheap REITs with huge upside.
Aerial view of high-rise buildings representing the investing and ownership of Equity Real Estate Investment Trust.
Our Methodology:
In order to compile a list of the 10 cheap REITs with huge upside, we first used Yahoo stock screener to find a list of REITs with a forward P/E under 15. We then selected the 10 stocks that had the highest upside potential. The 10 cheap REITs with huge upside are arranged in ascending order of their average upside potential, as of October 24.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Cheap REITs with Huge Upside
10. Redwood Trust, Inc. (NYSE:RWT)
Average Upside Potential: 12.12%
Forward P/E: 8.60
Number of Hedge Funds: 11
Redwood Trust, Inc. (NYSE:RWT) is a specialty finance company that has been enabling access to housing opportunities for American homebuyers and renters since 1994. The firm invests in mortgages for single-family and rental properties. Additionally, the firm acquires, sells, and securitizes residential loans and offers a steady source of liquidity to the owner-occupied and rental markets.
Redwood Trust, Inc. (NYSE:RWT) boasts a robust and organically grown investment portfolio. This portfolio comprises investments sourced organically through the Residential and Business Purpose Mortgage Banking operating businesses, and through other partnerships and third parties. The firm’s products serve some of the largest addressable markets in housing finance. Furthermore, Redwood has demonstrated the ability to capture additional market share amidst a changing regulatory environment. Regulatory reform has also been the major market catalyst for housing finance over the past 30 years.
During the second quarter, the REIT reported GAAP net income available to common stockholders of $13.8 million. In Residential Consumer Mortgage Banking, Redwood locked $2.7 billion of loans, up 49% from the first quarter of 2024. In Residential Investor Mortgage Banking, the REIT funded $459 million of loans, up 41% from the first quarter of 2024. In regards to the investment portfolio, the firm deployed almost $133 million of capital into internally sourced and third-party investments marking the largest quarter of deployment since the third quarter of 2022.
Thus, Redwood Trust, Inc. (NYSE:RWT) has a strong mission to make quality housing accessible to all American households. The firm boasts a strong position, unique partnerships driving the path to transformative scale, and a vast total addressable market. In the words of the REIT, to own RWT is to hold the keys to tremendous option value on the future of housing finance.
9. AG Mortgage Investment Trust, Inc. (NYSE:MITT)
Average Upside Potential: 14.71%
Forward P/E: 7.06
Number of Hedge Funds: 11
AG Mortgage Investment Trust, Inc. (NYSE:MITT) is a pure-play residential mortgage REIT. The firm is focused on investing in a diversified portfolio of residential mortgage-related assets in the US mortgage market. It primarily focuses on acquiring and securitizing newly-originated residential mortgage loans within the Non-Agency segment of the housing market. As of June 30, AG Mortgage Investment Trust, Inc. (NYSE:MITT) has a $6.9 billion investment portfolio.
The REIT is externally managed by AG REIT Management, LLC, an affiliate of Angelo, Gordon & Co., L.P. (TPG Angelo Gordon). To secure long-term, non-recourse, non-mark-to-market financing, the firm utilizes TPG Angelo Gordon’s proprietary, best-in-class securitization platform. Hence, MITT enables investors to have access to a high-quality investment portfolio, investment opportunities in the Non-Agency residential mortgage loan market, best-in-class securitization platform, and a team with expertise in the mortgage and structured credit industry.
Furthermore, the REIT has established partnerships and relationships with top non-bank originators and large financial institutions providing a strategic advantage to sourcing investments. MITT claims to have one of the most tenured structured credit teams in the industry with 20 years of experience on average. AG Mortgage Investment Trust, Inc. (NYSE:MITT) has also demonstrated a strong performance as compared to other mortgage REITs while providing investors with significant upside potential in stock price.
The firm’s most recent Q2 performance reflected continued strength in the earnings available for distribution supporting the 5.6% increase in its Q2 common dividend compared to the dividend per common share declared in the first quarter. Recently in September, the REIT announced a third quarter 2024 common dividend of $0.19 per share. Overall, AG Mortgage Investment Trust, Inc. (NYSE:MITT) serves as a leader in Non-Agency residential mortgage housing finance which opportunistically invests in growing markets within the Non-Agency housing ecosystem.
8. Franklin BSP Realty Trust, Inc. (NYSE:FBRT)
Average Upside Potential: 15.92%
Forward P/E: 7.72
Number of Hedge Funds: 8
Franklin BSP Realty Trust, Inc. (NYSE:FBRT) originates, acquires, and manages a diversified portfolio of commercial real estate debt primarily first mortgage loans. The REIT’s portfolio of debt investments is generally secured by real estate located in the United States. Additionally, the firm invests in subordinate loans, mezzanine loans, and securities. FBRT had approximately $6.3 billion of assets, as of June 30.
The firm maintains a diversified portfolio that is capable of generating attractive risk-adjusted returns and a stable income. One of the strengths of the REIT is that the process is handled internally including the origination, underwriting, and asset management. The REIT also boasts a strong network of broker and borrower relationships which leads to proprietary deal flow and an extensive pipeline of investment opportunities.
Franklin BSP Realty Trust, Inc. (NYSE:FBRT) continues to take advantage of attractive market opportunities. It closed $622 million of new loan commitments at a weighted average spread of 318 basis points in Q2. The REIT has originated $1.2 billion of new loan commitments year-to-date in 2024. The REIT has been actively originating loans in the middle market. In September, FBRT announced the closing of a $1.024 billion Commercial Real Estate Collateralized Loan Obligation.
Franklin BSP Realty Trust, Inc. (NYSE:FBRT) has a diversified portfolio of senior, floating rate loans, a national origination footprint, an experienced real estate team, and a credit-focused culture. As of October 24, the average upside for the stock is 15.92%.
7. Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI)
Average Upside Potential: 16.96%
Forward P/E: 7.47
Number of Hedge Funds: 7
Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) is a commercial mortgage real estate investment trust that originates senior secured loans primarily to state-licensed cannabis operators in limited-license states in the United States.
Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) has a growing loan portfolio diversified across geographies, operators, and asset types with strong real estate collateral coverage and additional collateral. The firm is chosen by operators on the basis of its strong brand reputation, strong ties to financial sponsors active in the cannabis space, deep industry knowledge, and execution on a timely basis.
The market opportunity for the firm remains promising considering that sales of the US cannabis industry are to rival beer, wine, and spirits by 2030. The trends of state legalization of cannabis for medical and adult use, and increased consumer adoption will continue to drive the demand for financing in the cannabis market. Furthermore, the firm faces limited competition in a highly fragmented market due to the federal prohibition on cannabis use and commercialization restricting commercial and financial activities.
In the second quarter, Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) recorded a net interest income of approximately $13.2 million which was consistent with the first quarter of 2024. Net income and distributable earnings declined sequentially. During the quarter, the REIT had total gross originations of $20.9 million out of which $11.2 million and $9.7 million was funded to new borrowers and existing borrowers respectively. Furthermore, the firm increased the size of the revolving credit facility to $105 million in total and raised over $6 million of capital through the ATM program.
In short, Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) serves as the lender of choice to cannabis industry operators through a proprietary sourcing network, a growing portfolio with attractive risk-adjusted returns, a strong record of identifying market inefficiencies, and favorable industry conditions.
6. Starwood Property Trust, Inc. (NYSE:STWD)
Average Upside Potential: 17.01%
Forward P/E: 10.20
Number of Hedge Funds: 25
Starwood Property Trust, Inc. (NYSE:STWD) is an affiliate of the global private investment firm Starwood Capital Group. The firm serves as one of the largest commercial mortgage REITs in the United States. It has been organized into complementary business segments including real estate lending, real estate investing and servicing, property, and infrastructure lending.
Starwood Property Trust has a distinct position in the global real estate finance market as one of the world’s leading diversified real estate finance companies. The REIT has navigated multiple real estate cycles and has deployed more than $98 billion of capital since its inception, as of June 30. With the average size of its loans being approximately $100 million since inception, the scale of the firm is clear. Since Starwood Capital Group is one of the largest institutional real estate investors globally, Starwood Property Trust takes advantage of its global reach.
Since the firm has been diversified into investment cylinders other than commercial lending, it has outperformed in a relatively challenging global property market. However, the management believes that the hard phase is behind them, with an easing US and Europe market to be seen in the future. The firm’s access to capital and liquidity has further allowed it to consistently invest across its businesses.
Starwood Property Trust, Inc. (NYSE:STWD) is a top diversified real estate finance company with a market capitalization of $6.74 billion. Since the firm’s founding 15 years back, it has delivered a consistent dividend and an over 10% annualized return. The REIT boasts a portfolio of $26 billion across the Commercial and Residential Lending, Infrastructure Lending, Investing & Servicing, and Property business segments.
5. TPG RE Finance Trust, Inc. (NYSE:TRTX)
Average Upside Potential: 18.34%
Forward P/E: 11.11
Number of Hedge Funds: 19
TPG RE Finance Trust, Inc. (NYSE:TRTX) originates first-mortgage loans greater than $50 million in primary and select secondary markets across the US. The REIT creates highly structured financing solutions for property owners with transitional capital needs across a variety of real estate asset types. It manages a $3.3 billion portfolio of assets in primary and secondary US markets, as of June 30.
The REIT is externally managed by TPG RE Finance Trust Management, L.P., a part of TPG Real Estate which is the real estate investment platform of global alternative asset management firm TPG. TRTX advantages from the network and market insight of TPG’s Real Estate equity investing team which invests in real estate-intensive operating companies and large portfolios of commercial properties across the US and Europe. Additionally, the REIT has decades of lending experience which enables long-standing relationships with operators, brokers, and equity providers.
The REIT’s investment portfolio delivered a strong performance against an uncertain macroeconomic environment in Q2. TPG RE Finance Trust, Inc. (NYSE:TRTX) generated distributable earnings of $0.28 per share and GAAP net income attributable to common stockholders of $21.0 million. The firm closed the quarter with $389.4 million of near-term liquidity and a debt-to-equity ratio of 2:1 which according to the CEO improves its ability to pursue new investment opportunities across the evolving real estate credit landscape.
With an extensive relationship network, unparalleled market insight, and solid experience, TPG RE Finance Trust, Inc. (NYSE:TRTX) is a leading commercial real estate finance company.
4. ACRES Commercial Realty Corp. (NYSE:ACR)
Average Upside Potential: 22.63%
Forward P/E: 8.25
Number of Hedge Funds: 5
ACRES Commercial Realty Corp. (NYSE:ACR) primarily focuses on originating, holding, and managing commercial real estate mortgage loans and other commercial real estate-related debt investments. The REIT is externally managed by ACRES Capital, LLC, a subsidiary of ACRES Capital Corp which is a private commercial real estate lender dedicated to nationwide middle market CRE lending and focuses on office, student housing, multifamily, hospitality, industrial and other asset types in top US markets.
The REIT offers a diversified commercial real estate loan portfolio with income protection. Other than having a long-term origination track record, the firm has established relationships with financing institutions. Furthermore, ACRES Commercial Realty Corp. (NYSE:ACR) has a massive opportunity in the vast US commercial real estate market to benefit from.
For the second quarter, ACRES Commercial Realty Corp. (NYSE:ACR) reported GAAP net income allocable to common shares of $1.7 million. Earnings available for distribution increased to $0.51 per share from $0.16 per share in the previous quarter. Furthermore, the REIT closed the quarter with a commercial real estate loan portfolio of $1.7 billion across 64 individual investments.
Hence, ACRES Commercial Realty Corp. (NYSE:ACR) is another cheap real estate investment trust with a well-balanced and solid commercial real estate loan portfolio. As of October 24, the average upside potential for the stock stands at 22.63%.
3. Ladder Capital Corp (NYSE:LADR)
Average Upside Potential: 23.06%
Forward P/E: 8.96
Number of Hedge Funds: 12
Ladder Capital Corp (NYSE:LADR) is an internally managed commercial real estate investment trust. The firm originates and invests in a diverse portfolio of commercial real estate and real estate-related assets. Ladder Capital Corp was founded in 2008 and is headquartered in New York City.
Ladder Capital Corp (NYSE:LADR) serves as one of the nation’s leading commercial real estate capital providers. The REIT has a diversified CRE investment portfolio with $5.5 billion of investment assets and unrestricted cash, including CRE loans, equities, and securities. This includes $2.0 billion of first mortgage loans, $946 million of CRE equity, and $853 million of securities. The loan portfolio stands solid with 88% of it comprising of post-COVID originations.
For the third quarter of 2024, the firm reported distributable EPS of $0.30. In regards to investment activity, LADR originated a $24 million first mortgage loan secured by a multifamily property in Phoenix subsequent to the quarter-end while it funded $3 million of advances on previously originated loans. Furthermore, LADR issued $500 million of new unsecured corporate bonds due 2031.
The CEO Brian Harris reiterated that the REIT has significant liquidity and is engaging in new origination opportunities considering real estate markets stabilizing and the recent $500 million unsecured corporate bond offering. The average upside potential for Ladder Capital Corp (NYSE:LADR) is 23.06%, as of October 24.
2. Rithm Capital Corp. (NYSE:RITM)
Average Upside Potential: 23.11%
Forward P/E: 5.68
Number of Hedge Funds: 25
Rithm Capital Corp. (NYSE:RITM) is an asset manager focused on real estate and financial services. The firm invests across a variety of real estate and financial services assets some of which include residential mortgage loans, consumer loans, residential transitional loans, and commercial real estate. Rithm has a family of operating companies including Newrez, Shellpoint, Genesis Capital, Guardian, Avenue 365 Lender Services, eStreet, Adoor, GreenBarn, and Sculptor.
Rithm has grown from a manager of just mortgage servicing rights to an investment platform with an opportunistic portfolio across the real estate and financial services sectors. The firm has a distinct competitive advantage in the form of vertically integrated operating companies with capabilities in direct asset sourcing, asset optimization, and capital markets. Rithm’s diversified portfolio of investments and operating companies has a record of performing amidst changing economic conditions.
The second quarter reflected the strength of Rithm’s core businesses. The firm posted GAAP net income of $213.2 million and earnings available for distribution of $0.47 per diluted common share. The overall momentum remained robust with the continued growth of the Newrez franchise, Genesis Capital producing a near-record level of originations at $836 million, and Rithm completing the transaction to serve as the external manager to the mortgage REIT Great Ajax (NYSE: AJX).
While the firm was founded in 2013 under Fortress Investment Group to capitalize on an investment opportunity in mortgage servicing rights, it has delivered more than 10 years of stable results. Its diversified and strong platform positions Rithm Capital Corp. (NYSE:RITM) to continue its growth trajectory as a leading global asset manager.
1. Safehold Inc. (NYSE:SAFE)
Average Upside Potential: 24.09%
Forward P/E: 14.08
Number of Hedge Funds: 13
Safehold Inc. (NYSE:SAFE) serves as the first publicly traded company to focus on modern ground leases. Safehold’s ground lease helps building owners generate a stronger return profile and lower cost of capital with less risk while lowering the upfront equity requirements. The REIT gives investors access to an ownership stake in a dynamically growing and diversified portfolio of ground leases.
Safehold is the only nationally-scaled platform focusing on making ground leases value-enhancing for customers. Through an innovative ground lease platform, the firm tries to capture the value of economic activity in the top US markets. SAFE targets well-located, institutionally owned commercial real estate with attractive fundamentals diversified across the top 30 MSAs, which the firm believes are positioned for long-term sustainable growth.
Safehold Inc.’s (NYSE:SAFE) Q2 GAAP net income and EPS increased 34% and 20% year-over-year respectively. The firm originated six multifamily ground leases for $98 million during the quarter. It funded a total of $78 million which includes $37 million of new Q2 originations that have a 7.5% economic yield and $41 million of existing ground leases that have a 6.4% economic yield.
Therefore, Safehold Inc. (NYSE:SAFE) is a market leader of the modern ground lease industry which has grown its portfolio from $0.3 billion to $6.5 billion since 2017 IPO thereby building national scale and brand equity over the years. It is important to consider that ground leases are a compelling asset class and investors can participate in this historically inaccessible asset class with a significant addressable market through SAFE.
While we acknowledge the potential of SAFE as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than SAFE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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