REITs With Great Upside Potential: Navigating Recovery Through Valuation Arbitrage

The commercial real estate sector has faced headwinds in recent years, from rising interest rates to shifting tenant preferences. Yet within this landscape, certain REITs in resilient sectors—industrial and healthcare—present compelling opportunities for valuation arbitrage. These companies boast defensive lease structures, strong occupancy metrics, and undervalued stock prices, offering a favorable risk-reward profile amid macroeconomic uncertainty. Below, we analyze top picks in each sector and explain why their current valuations may understate their long-term potential.

Industrial REITs: Anchored in Supply Constraints

The industrial sector remains a bastion of demand due to e-commerce growth, supply chain reconfigurations, and the need for last-mile logistics infrastructure. Two REITs stand out for their valuation discounts and robust fundamentals: Granite REIT (GRYTF) and EastGroup Properties (EGP).

Granite REIT (GRYTF): A Buy Below $60

Granite owns 63.3 million square feet of Class A warehouses in high-growth markets like Ontario and the Netherlands. Its 4.8% dividend yield and 60% AFFO payout ratio signal financial conservatism, while its 94.8% occupancy (as of Q2 2025) reflects enduring tenant demand. The company's recent $31.5 million share buyback at $63.42 per share underscores management's confidence in its intrinsic value.

Valuation Edge: Analysts recommend buying GRYTF at $60 or below, a 5% discount to its recent buyback price. With lease renewals offering double-digit rental increases and $35 million in vacant space slated for leasing by year-end, Granite's FFO per share could rise sharply, closing the valuation gap.

EastGroup Properties (EGP): A Top Pick in Supply-Constrained Markets

EastGroup focuses on shallow-bay distribution centers in constrained markets like Texas and Florida. Its 96.8% occupancy and 10.2% dividend growth in 2025 reflect the scarcity value of its assets. With $113 million in liquidity for acquisitions and development projects (e.g., the Bell Creek Logistics Center), EGP is well-positioned to capitalize on rising demand.

Valuation Edge: Trading at a discount to its 5-year average price-to-FFO multiple, EGP offers a 4.3% dividend yield and exposure to sectors like e-commerce and cold storage. Its upcoming Q2 earnings (July 24) could catalyze a rerating if occupancy or rental growth metrics exceed expectations.

Healthcare REITs: Resilience in a Growing Market

Healthcare REITs benefit from secular tailwinds, including aging populations and rising outpatient care demand. Healthpeak Properties (PEAK) and Plymouth Industrial REIT (PLYM) (yes, industrial but with healthcare ties) exemplify this theme.

Healthpeak Properties (PEAK): Outperforming Through Specialization

Healthpeak combines a 6.35% dividend yield with 7% same-store NOI growth in Q1 2025, driven by lab and continuing care retirement community (CCRC) leases. Its 92.3% occupancy and 6.2-year average lease term provide stability, while its focus on high-barrier-to-entry assets (e.g., lab space) limits competition.

Valuation Edge: With a FFO payout ratio of 66% and a $2.8 billion liquidity buffer, PEAK can weather macro risks. Its $5B+ Cambridge Point development (a lab/residential mixed-use project) adds long-term growth potential. Analysts see a 20% upside to $30/share, based on its 2026 FFO estimates.

Plymouth Industrial REIT (PLYM): Niche Healthcare Exposure

While primarily industrial-focused, PLYM benefits from healthcare-driven demand in logistics hubs like St. Louis. Its Q2 leasing activity—10% rent spreads on 1.45 million sq. ft.—demonstrates pricing power. Short-term leases with auto-renewals and kick-out options allow PLYM to reposition space as markets improve, mitigating occupancy risks.

Valuation Edge: At a 4.5% dividend yield and 50% discount to its NAV estimate, PLYM's shares could rebound if its Memphis market challenges resolve. Investors should monitor its August 7 earnings call for updates on 2026 lease progress.

Defensive Lease Structures: A Shield Against Uncertainty

Both sectors excel in lease terms that dampen economic volatility:
- Industrial: Granite's 70% fixed-rate debt and EastGroup's shallow-bay facilities (suited for last-mile logistics) reduce interest rate and demand risks.
- Healthcare: Healthpeak's long-term leases (avg. 6.2 years) and Plymouth's flexible short-term structures ensure steady cash flows even in downturns.

Risks and Considerations

• Interest Rates: Higher borrowing costs could pressure REIT margins, but low AFFO payout ratios (e.g., Granite's 60%) provide buffers.
• Occupancy Deterioration: A drop below 93% (Granite) or 95% (EastGroup) would signal broader sector weakness.
• Policy Risks: Healthcare REITs face regulatory uncertainty, but tenant relationships with major health systems (e.g., HCA) mitigate this.

Final Take: Buy Now, Reap Later

The current environment offers a rare opportunity to buy high-quality REITs at discounts to intrinsic value, with sector-specific tailwinds (e-commerce growth, aging demographics) and defensive leases shielding against macro risks.

Top Picks:
1. EastGroup Properties (EGP): Top for income and growth investors.
2. Healthpeak Properties (PEAK): For long-term healthcare exposure.
3. Granite REIT (GRYTF): A value play at $60/share.

Investment Thesis: These REITs combine strong fundamentals, undervalued stock prices, and structural growth drivers. Investors who buy now may benefit from valuation re-rates in 得罪了 the backtest results, which show EGP historically outperforming around earnings when occupancy metrics are strong—a positive sign for its July 24 report. Meanwhile, PLYM's mixed backtest performance underscores the need for caution until its market challenges resolve.

This analysis is for informational purposes only. Always conduct your own research or consult a financial advisor before making investment decisions.