A slight bump in stock futures is not doing much to change the overall picture of the market right now. A quick look through the current headlines reveals the frequent presence of that dreaded s-word, “stagflation.”

It seems pretty certain at this point that we’re headed for a slowdown in economic activity coupled with extremely stubborn inflationary pressures. The U.S. Federal Reserve’s ability to impact inflation with interest rate hikes is more constrained than it was in the 1970s, and the continuing aftershocks of the pandemic and the Russia-Ukraine war are pushing the global supply chain recovery out longer than anyone wants.

As a result, investors of all stripes are massively shifting their portfolios around, selling off huge quantities of stocks to preserve capital and focus on safer staples that are less vulnerable when we’re in bear market territory.

It’s not a secret that, over the years, I have learned to love real estate investment trusts. While many investors ignore REITs as they pursue the next big thing, I have learned that it’s usually a better business decision to be the landlord of all the candidates for the next big thing and just collect the steady rent payments.

REITs are an ideal asset class for the current market for one main reason: No matter the market, everyone’s got to pay their rent. There are almost no market conditions that could seriously threaten a REIT’s cash flow, which means your dividends are protected.

Right now, I’m nearly convinced that most investors would be better served by owning REITs and small banks and ignoring everything else.

Today, I want to talk about two REITs that everyone else is ignoring for one reason or another. They are trading at ridiculous valuations and therefore have tremendous upside potential, and both offer high dividend yields in excess of 7%.

Here they are…

This Is Where E-Commerce Stores All of Its Stuff

Industrial Logistics Properties Trust (NASDAQ: ILPT) is in one of the strongest segments of the real estate market, but the stock has been a horrible performer over the last year, with a decline of about 40%. Industrial Logistics owns warehouses around the United States and has an extremely valuable portfolio of Hawaiian industrial holdings that consists of 226 properties near the central business district of Oahu.

This REIT’s biggest tenants include Amazon, Federal Express, and UPS, the three horsemen of the e-commerce revolution.

Other tenants include high-quality companies like Coca-Cola of Hawaii, Safeway, BJ’s Wholesale Clubs, and Restoration Hardware. Most of the rental income comes from ground leases, and the tenants have spent a fortune on improvements to the properties. The warehouse space is essential to their business, especially in a market like Hawaii, where everything is flown or shipped in.

So, I know what you’re thinking: Why is the price down?

Industrial Logistics recently closed on a deal to buy another industrial REIT, Monmouth Properties. I wasn’t happy about this because I really wanted to see Monmouth sold to Equity Commonwealth (EQC), a cash-rich REIT chaired by legendary real estate investor Sam Zell. Unfortunately, it didn’t work out that way, and Industrial Logistics ended up buying Monmouth.

They had to pull off some tricky financial maneuvers to get the deal done, and the market didn’t like all the shuffling of properties that went on to fund the purchase.

I think the selling has been excessive. The transaction added 126 single-tenant properties around the United States, focusing on key Southeastern markets. The portfolio is e-commerce-focused, and many of the properties are located near key airports, shipping ports, and transportation hubs.

Shares of ILPT are currently trading at 95% of book value, just seven times funds from operations. They have very high occupancy rates, and warehouse and industrial space will continue to see demand from the continued growth of e-commerce and the rebuilding of the supply chain. If the shares were priced at the same valuation as other industrial REITs, the stock would be two to three times higher, so the shares have tremendous upside potential.

While you wait for the gains to happen, you’ll be collecting a dividend yield of almost 9%.

This Company’s Poorly Timed IPO Gives Us a Huge Profit Opportunity

Modiv Inc. (NYSE: MDV) had its initial public offering back in February at $25 a share. The price has since slid all the way down to around $15 because the fear of rising rates has kept buyers out of the REIT market for the most part. With little to no analyst coverage and subdued institutional interest, there have simply been no buyers for the shares.

Motiv is an internally managed real estate investment trust that acquires, owns, and actively manages single-tenant retail, office, and industrial properties throughout the United States. As of this month, it currently has 44 properties located in 16 states. Modi’s real estate investment portfolio comprises approximately 46% industrial, 19% retail, and 35% office properties. It has been actively reducing its exposure to office space this year.

The company released guidance for 2022 earlier this week. Modiv is establishing an initial 2022 per share guidance range of $1.26 to $1.36 a share of adjusted funds from operation this year. That means the stock is trading at about 12 times funds from operations right now.

Even more significantly, Modiv’s Tangible Book Value is over $20 a share. In addition, Modiv has a recent third-party appraisal of $27 a share of the value of the property it owns. So the shares are trading at a massive discount to the value of the assets Modiv owns right now.

A look into the properties shows that tenants include Dollar Tree, Dollar General, Costco, Walgreens, and other credit-worthy tenants who will have no problem paying the rent on time. The portfolio’s weighted average lease term was 10.6 years as of the end of the first quarter.

In its most recent transaction, Modiv completed a $56 million sale-leaseback with Lindsay, an industry-leading precast concrete manufacturer and steel fabricator with a 60-year operating history. The portfolio includes eight properties located in Colorado, Ohio, Florida, North Carolina, and South Carolina used for manufacturing and distribution.

These properties have a 25-year lease term with 2% annual rent increases.

I am also a big fan of the management team at this REIT. The entire team has extensive real estate experience and outstanding track records of success.

Modiv made its initial offering to become a public company at a bad time. The shares debuted in a blossoming bear market, and institutions have no appetite for commercial real estate right now.

That’s creating a massive opportunity for us. With the stock at 76% of tangible book value and less than 60% of the current appraised value of the properties, we are buying a well-run REIT that is growing at a fast pace for a bargain price.

In addition, shares are yielding 7.2% right now, and I expect to see that grow as management continues to grow the asset base.

— Tim Melvin

Source: Money Morning