Although there has been an improvement in the fundamentals of the real estate market from the onset of the pandemic, there are concerns stemming from rate hikes to tame inflation, geopolitical issues and the outlook for economic growth. These are affecting the leasing activity of several asset categories and hurting the REIT and Equity Trust - Other industry’s overall prospects.
However, with the industry offering the real estate structure for several economic activities, be it real or virtual, there are pockets of strength even amid its overall weakness. Particularly with the holiday season around the corner, improving lodging industry fundamentals with the resurgence of business travel and a solid recovery in the U.S. advertising market, VICI Properties Inc. VICI, Lamar Advertising Company LAMR and Chatham Lodging Trust CLDT are likely to benefit.
About the Industry
The Zacks REIT and Equity Trust - Other industry is a diversified group that covers REIT stocks from different asset categories like industrial, office, lodging, healthcare, self-storage, data centers, infrastructures and others. The Equity REITs rent spaces in these properties to tenants and earn rental incomes. Economic growth plays a pivotal role for the real estate sector as economic expansion translates into greater demand for real estate, higher occupancy levels and landlords’ increased power to ask for higher rents. Also, the performance of Equity REITs depends on the underlying asset dynamics and location of properties. So, delving into the fundamentals of these asset categories is essential before making any investment decision. It is important to figure out whether the pandemic-induced behaviors result in only a short-term impact or long-term structural changes.
What's Shaping the Future of the REIT and Equity Trust - Other Industry?
Rate Hike, Geopolitical Tension Raise Concerns: The recent hikes in interest rate by the Federal Reserve to tame inflationary issues is a concern because the dependence of REITs on debt for business is more compared to the other industries. This makes investors skeptical about their performance in a rising rate environment. Also, as the investment world treats REITs as bond substitutes for their high and consistent dividend-paying nature, these companies are susceptible to rising rates. This is why REITs’ price performance tends to fluctuate when the Fed is optimistic about raising rates. Moreover, geopolitical tensions have affected the commodities market, thereby fueling inflation. Also, the downside risk to the outlook for economic growth has increased. This has raised concerns about REITs’ performance as economic growth plays a pivotal role in shaping the demand for real estate properties. In fact, leasing activity gets adversely affected amid economic uncertainty, high inflation and rising interest rates.
Inflationary Pressures and Supply-Chain Woes: Inflationary pressures and supply-chain woes have pushed property operating expenses higher, and any significant turnaround is likely to remain elusive in the near term. With a tight labor market and continued supply-chain issues, personnel and repairs, and maintenance and material costs, as well as costs of development and expansion activities, are expected to soar for the Equity REIT stocks.
Demand for Certain Asset Categories Continues to Improve: However, demand for certain asset categories remains robust, while a number of property types, which once faced a severe blow because of the pandemic, are now on the path to recovery. Sectors like industrial, infrastructure and data centers, which support the digital economy, are likely to continue prospering in the foreseeable future. Over the long term, apart from the fast adoption of e-commerce, logistics real estate is expected to benefit from a likely increase in inventory levels. Growing reliance on technology and acceleration in digital transformation strategies by enterprises are offering immense opportunities to data centers and infrastructure REITs. Migration and downsizing trends, remodeling and an increase in the number of people renting homes have escalated the needs of consumers to rent space at a storage facility to park their possessions, benefiting the self-storage REITs. Moreover, there is increased optimism backed by the rebounding fundamentals of the lodging industry, with strong leisure demand and improving levels of corporate and group demand. Also, the healthcare REITs, which are poised to benefit from strong demographic demands amid the aging of the baby boomer generation, are experiencing an improvement in occupancy in senior housing assets due to widespread vaccination drives. Office REITs, which were hit hard by the pandemic-led job cuts and a remote working environment, are expected to gradually benefit from the increase in office-using employment and return-to-office initiatives.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks REIT and Equity Trust - Other industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #157, which places it at the bottom 38% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 a result of the negative funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are losing confidence in this group’s growth potential of late. Over the past three months, the industry’s FFO per share estimates for 2022 have declined 0.6%. The same for 2023 has moved 5.5% south over the past year.
Before we present a few stocks that 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 has underperformed both the S&P 500 composite as well as the broader Zacks Finance sector in a year’s time.
The industry has declined 20.8% during this period compared with the S&P 500’s fall of 17.3%. Meanwhile, the broader Finance sector has declined 13%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-FFO ratio, which is a commonly-used multiple for valuing REIT - Others, we see that the industry is currently trading at 15.16X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.60X. However, the industry is trading above the Finance sector’s forward 12-month P/E of 13.66X. This is shown in the chart below.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Over the last five years, the industry has traded as high as 22.10X, as low as 14.25X, with a median of 17.72X.
3 Equity REIT - Others Stocks Worth Betting On
VICI Properties Inc.: New York, NY-based VICI Properties Inc. is an experiential REIT engaged in the business of owning, acquiring and developing gaming, hospitality and entertainment destinations.
VICI Properties enjoys the 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 grow its portfolio and team up with the best-in-class tenants. Such efforts are likely to aid 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 $1.91 reflects a nearly 5% increase year over year.
Moreover, over the past month, the Zacks Consensus Estimate for 2023 FFO per share witnessed a 1.5% upward revision to $2.07, reflecting analysts’ bullish outlook. VICI Properties’ long-term growth rate is projected at 5.40%. The stock has also rallied 6.6% so far in the quarter.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Lamar Advertising Company: Headquartered in Baton Rouge, LA, Lamar Advertising Company is one of the largest owners and operators of outdoor advertising structures in the United States. This REIT offers advertisers a variety of billboard, interstate logo, transit and airport advertising formats, enabling local businesses and national brands outreach broad audiences on a daily basis.
Lamar Advertising’s encouraging third-quarter results reflected better-than-anticipated revenues aided by the solid recovery in the U.S. advertising market and continued sales momentum across its billboard, transit and airport and logos businesses.
Lamar Advertising is well poised to benefit from its impressive footprint of outdoor advertising assets across the United States and Canada. Also, the company’s unmatched logo signs business and diversified tenant base across various sectors act as tailwinds.
Technological advancements are aiding the shift to the low-cost, out-of-home advertising platform. Further, Lamar’s strategic buyouts to expand its portfolio bode well for its long-term growth.
LAMR currently carries a Zacks Rank #2. The Zacks Consensus Estimate for Lamar Advertising’s 2022 and 2023 FFO per share have moved 1.4% and 2.8%, respectively, over the past month. The stock has also rallied 16.3% so far in the quarter.
Chatham Lodging Trust: Headquartered in West Palm Beach, FL, this lodging REIT invests in upscale, extended-stay hotels and premium-branded, select-service hotels. CLDT is poised to gain from its well-located properties in markets with strong demand drivers.
This increased optimism is backed by the rebounding fundamentals of the lodging industry, with the resurgence of the business traveler. The company’s top business travel markets are experiencing year-over-year growth, and CLDT has the capacity to leverage growth potential.
Additionally, the recent trend in estimate revisions for 2022 FFO per share indicates a favorable outlook for CLDT, with estimates moving 7.3% north over the past month. This also indicates a significant year-over-year increase. CLDT currently carries a Zacks Rank #2. The stock has also rallied 28.4% so far in the quarter.
Note: Funds from operations (FFO) is a widely used metric to gauge 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 subtracting the gains on sales.
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Lamar Advertising Company (LAMR) : Free Stock Analysis Report
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