3 Equity REIT Stocks to Bet on Despite Industry Hiccups – January 30, 2023
Despite an improvement in property market fundamentals since the start of the pandemic, there are concerns stemming from interest rate hikes to tame inflation, geopolitical issues and an economic slowdown. This affects the leasing activity of various asset categories and harms the REIT and Equity Trust – Other industry’s overall outlook.
However, with the industry providing the property structure for various economic activities, whether real or virtual, there are strengths even in the midst of this challenging environment. In particular, with the growth of the digital economy, commercial real estate that supports it, such as industrial and data centers, is likely to thrive for the foreseeable future. The easing of travel restrictions is also encouraging. Amidst this background, VICI Properties Inc. (VICI Quick QuoteVICI – Free Report), STAG Industrial, Inc. (STAG Quick QuoteSTAG – Free Report) and Gladstone Commercial Corporation (GOOD Quick QuoteGOOD – Free Report) are likely to thrive.
About the industry
The Zacks REIT and Equity Trust – Other Industry is a diversified group that covers REIT stocks from different asset categories such as industrial, office, lodging, healthcare, self storage, data centers, infrastructure and others. Equity REITs lease spaces in these properties to tenants and earn rental income. Economic growth plays a crucial role for the real estate sector as economic expansion leads to greater demand for real estate, higher occupancy levels and landlords’ greater power to charge higher rents. The performance of Equity REITs also depends on the underlying asset dynamics and location of properties. It is therefore essential to delve into the fundamentals of these asset categories before making any investment decision. It is important to find out whether the pandemic-induced behavior has only a short-term impact or long-term structural changes.
What shapes the future of the REIT and unit trust – other industries?
Rate hike, recession woes to make it challenging: The commercial real estate market is likely to remain challenging in the near term, given higher interest rates and recession woes. This is because the reliance of REITs on debt for business is more compared to the other industries, making investors skeptical about their performance in a rising rate environment. Since the investment world treats REITs as bond substitutes for their high and consistent dividend-paying nature, these companies are also susceptible to rising rates. The geopolitical tensions affected the commodity market and thus fueled inflation. Recession fears have also raised concerns about REITs’ performance, as economic growth plays a crucial role in shaping demand for real estate. In fact, rental activities are adversely affected amid economic uncertainty, high inflation and rising interest rates.
Certain asset categories to continue to bear the brunt: Demand for a number of asset categories is likely to remain choppy in the near term. In the office real estate market in particular, the widespread adoption of hybrid work continues. While demand for high-quality and well-located office buildings with employee wellness and productivity-enhancing amenities is likely to improve, older buildings with outdated facilities will find it difficult to attract tenants, in turn increasing the overall office vacancy rate. Amid a turbulent economic environment and a downturn in capital financing as well as increased supply due to new construction activity, the life science real estate market is likely to experience a moderation of rapid growth in previous years. In the case of hotels, while leisure travel and the resumption of inbound international travel are encouraging, transit business travel is still lagging. Given the turbulent economic environment and inflationary woes, and still limited office attendance, business travel is likely to remain subdued in the near term. As such, with lower revenue growth and higher wages and operating costs, margins are expected to remain under pressure.
Growth in the digital economy will continue to impact real estate: Sectors such as industry, infrastructure and data centers, which support the digital economy, are likely to thrive in the foreseeable future. Demand for industrial real estate space is expected to be driven by growth in e-commerce and supply chain transformations. The location of properties will also play a key role in driving demand. Markets with strong population growth and modern distribution space are expected to see superior demand to ensure prompt delivery of orders placed online. Also, locations near transportation hubs and high-quality infrastructure are likely to experience strong tenant demand. Increasing reliance on technology and acceleration in digital transformation strategies by enterprises presents tremendous opportunities to data center and infrastructure REITs.
Zacks Industry Rank indicates a bleak outlook
The Zacks REIT and Equity Trust – Other industry is housed in the broader Finance sector. It carries a Zacks Industry Rank #205, placing it in the bottom 18% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a bleak outlook in the short term. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is the result of the downward revision of funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the total FFO per share estimate revisions, analysts seem to be losing confidence in this group’s growth potential lately. Over the past year, the industry’s FFO per share estimates for 2022 have fallen by 7%. The same for 2023 has moved south 14.1% in the past year.
Before we present some stocks you might want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags on stock market performance
The REIT and Equity Trust – Other Industry underperformed the S&P 500 composite as well as the broader Zacks Financials sector in a year’s time.
The industry fell 14.4% during this period compared to the S&P 500’s decline of 11.1%. Meanwhile, the broader Finance sector fell by 8.2%.
One-year price performance
Industry’s current valuation
Based on the forward 12-month price-to-FFO ratio, which is a commonly used multiple for valuing REIT – Other, we see that the industry is currently trading at 16.12X compared to the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.29X. However, the industry trades above the financial sector’s forward 12-month P/E of 14.17X. This is shown in the graph below.
Forward 12-month Price-to-FFO (P/FFO) ratio
Over the past five years, the industry has traded as high as 22.10X, as low as 14.24X, with a median of 17.72X.
3 Equity REIT – Other stocks worth betting on
VICI Properties Inc.: New York, NY-based VICI Properties Inc. is an experience REIT engaged in the ownership, acquisition and development of gaming, hospitality and entertainment destinations.
VICI Properties enjoys ownership of three of the most iconic entertainment facilities on the Las Vegas Strip, namely Caesars Palace Las Vegas, MGM Grand and the Venetian Resort Las Vegas.
The company has made concerted efforts to expand its portfolio and partner with best-in-class tenants. Such efforts are likely to help VICI’s performance in the coming quarters.
VICI currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2022 FFO per share of $1.92 reflects a 5.5% year-over-year increase. Additionally, the Zacks Consensus Estimate for 2023 FFO per share saw a nearly 1% upward revision to $2.11 in the past month, reflecting analysts’ bullish outlook. VICI Properties’ long-term growth rate is projected at 7.00%. The share has also risen by 19.3% in the past year.
You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
STAG Industrial Inc.: Headquartered in Boston, MA, STAG Industrial focuses on the acquisition, ownership and operation of industrial properties throughout the United States.
STAG’s portfolio consisted of 563 buildings in 41 states, with approximately 111.6 million leasable square feet of space as of September 30, 2022.
STAG Industrial is poised to benefit from healthy demand following the rapid adoption of e-commerce, with leasing activities gaining support. Additionally, with supply chains transforming for faster fulfillment and resilience, STAG is likely to capture favorable fundamentals.
STAG currently carries a Zacks Rank #2. The Zacks Consensus Estimate for STAG Industrial’s 2022 and 2023 FFO per share has moved marginally north over the past two months to $2.21 and $2.25, respectively, representing a 7.3% and 2.1% year-over-year increase require. The stock has also risen by 13.3% in the past three months.
Gladstone Commercial Corporation: Headquartered in McLean, VA, this REIT focuses on the acquisition, ownership and operation of net leased industrial and office properties throughout the United States.
GOOD’s real estate portfolio consisted of 137 properties in 27 states, covering approximately 17.2 million square feet of space as of Sep 30, 2022.
Gladstone Commercial has witnessed active leasing, which has helped solid occupancy, healthy rental collections and ample liquidity to support its acquisitions and growth efforts.
On 31 December 2022, Gladstone Commercial’s portfolio occupancy was 96.8% due to successful letting activities. In addition, Gladstone Commercial collected 100% of fourth quarter 2022 cash base rent.
Gladstone Commercial is also focused on expansion. With a well-balanced portfolio and expansion efforts, GOOD is likely to capture favorable industrial real estate fundamentals.
Although the stock has fallen 5.3% over the past three months, the recent trend in 2023 FFO per share estimate revisions points to a favorable outlook for GOOD, with estimates moving northward 1.96% over the past month. GOOD currently has a Zacks Rank #1 (Strong Buy).
Note: Funds from operations (FFO) is a widely used metric to measure the performance of REITs rather than net income, as it indicates cash flow from their operations. FFO is obtained after adding depreciation and amortization to earnings and deducting the profits on sales.