3 Equity REIT Stocks Poised to Overcome Industry Hiccups
Although there has been an improvement in the fundamentals of the real estate market from the onset of the pandemic, the crisis-induced demand patterns are prevalent and hurting the REIT and Equity Trust - Other industry’s overall prospects. Also, the recovery of different asset categories is likely to be uneven. Adding to the woes are the rate hike anticipations and geopolitical tensions. 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 healthy fundamentals of the digital economy, migration trends, easing of restrictions and prospects for a rebound, Prologis, Inc. PLD, Crown Castle International Corp. CCI and Public Storage PSA 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 Future of the REIT and Equity Trust - Other Industry?
Rate Hike, Geopolitical Tension Raise Concerns: The Federal Reserve has already indicated its intention to raise interest rates in the upcoming FOMC meeting to address inflationary concerns. However, the dependence of REITs on debt for business 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, the Ukraine crisis and the resulting sanctions on Russia have affected the commodities market, thereby fueling inflation. Also, the downside risk to the outlook for economic growth has amplified. Therefore, in this uncertain environment, REITs’ performance is likely to be affected as economic growth plays a pivotal role in shaping the demand for real estate properties.
REITs to See Asymmetrical Recovery Across Sectors: The rebound in commercial real estate is likely to be imbalanced across sectors, with some lagging the overall economy. For the lodging/resorts real estate category, personal and vacation travel is recovering and creating demand for lodging spaces, particularly in markets that cater to domestic leisure travelers. However, business travel will likely recapture its lost ground at a slower pace, thanks to the online meetings and teleconferences substituting in-person events. Also, international travel, which already suffered due to the pandemic, continues to be affected amid the current geopolitical tensions. For the office REITs, while a number of firms plan to return to office with ebbing of the health crisis, others intend to adopt a more flexible hybrid model. As of now, the impact of the hybrid work model is difficult to be determined. This uncertainty is likely to continue affecting demand for office space, occupancy and rent growth. Particularly, the question remains with respect to the impact of new work patterns and office redesigning on space requirements. For healthcare REITs, although the recovery in occupancy in senior housing and skilled nursing in the latter half of 2021 has been encouraging, there is still a strain on costs for protection against infection. Also, any possibility of more uncertainty with respect to the health crisis, including new variants, will add to the chaos.
Demand for Certain Asset Categories to Remain Robust: Shift from in-person communication and commerce to the electronic platform that accelerated during the pandemic is expected to continue even as the pandemic fear fades. This shift to the digital economy is helping sectors like industrial, infrastructure, and data centers that support the digital economy to prosper in the foreseeable future. With stores reopening, brick-and-mortar sales have bounced back. Yet, e-commerce sales continue to build up on earlier gains, with people still preferring the convenience of online purchases for several items. While the sectors supported by digital economy are likely to continue thriving, a number of other asset categories are expected to ride the growth curve. Particularly, the self-storage REITs continue to benefit as the pandemic-led movement of people and the work-from-home environment are creating the demand for storage units, helping occupancy levels to remain elevated. Also, the strength in the housing market is likely to fuel the long-term growth of the self-storage industry. The healthcare REITs are likely to benefit from the strong demographic demands amid the aging of the baby boomer generation. Moreover, demand for life-science real estate has been solid and will likely remain so with effective diagnostics, testing, therapies and vaccines being required to fight the pandemic.
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 #155, 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 remained unchanged, while that for 2023 has moved 3.8% south.
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 Leads on Stock Market Performance
The REIT and Equity Trust - Other Industry has outperformed both the S&P 500 composite as well as the broader Zacks Finance sector in a year’s time.
The industry has appreciated 10.9%, during this period, compared with the S&P 500’s rally of 6.1%. Meanwhile, the broader Finance sector has gained 1.6%.
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 19.52X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.56X. The industry is trading above the Finance sector’s forward 12-month P/E of 15.03X. 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 22.39X, as low as 14.74X, with a median of 17.40X.
3 Equity REIT - Others Stocks Worth Betting on
Prologis: This is a leading industrial REIT that acquires, develops, operates and manages industrial properties in the United States and worldwide. The company continues to benefit from the scale of its platform.
This industrial REIT behemoth’s performance in the recent quarters reflects robust demand for its properties, an increase in market rents and low vacancies. Along with the fast adoption of e-commerce, logistics real estate is anticipated to gain from a rise in inventory levels. Given Prologis’ capacity to offer high-quality facilities in key markets and robust balance-sheet strength, it is well poised to bank on these trends.
PLD, currently, carries a Zacks Rank #2 (Buy). Over the past two months, the Zacks Consensus Estimate for 2022 FFO per share witnessed upward revision of 9.5% to $5.07, reflecting analysts’ bullish outlook. The stock has also rallied 10.9% over the past six months.
Crown Castle International Corp.: This REIT is engaged in ownership, operation and leasing of wireless communication towers in the United States. Moreover, investment in fiber and small-cell business on the back of acquisitions, construction and new deployments complements its tower business.
An increase in mobile data usage, spectrum availability and high network investments by wireless carriers to deploy 5G networks are anticipated to spur demand for CCI’s properties. Capitalizing on these, Crown Castle is well poised to grow.
Additionally, the recent trend in estimate revisions for 2022 FFO per share indicates a favorable outlook for CCI, with estimates moving north over the past two months to $7.38. This also indicates a year-over-year increase of 6.2%. CCI, currently, carries a Zacks Rank #2. The company’s shares have gained 7.4% over the past year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Public Storage: This REIT is primarily engaged in the acquisition, ownership, development and operation of self-storage facilities. PSA is, in fact, the most recognized and established name in the self-storage industry, with its presence across all major metropolitan markets of the United States.
The self-storage asset category is need-based and recession-resilient in nature. Additionally, the self-storage industry continues to benefit from favorable demographic changes. The migration and downsizing trend 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. Demand for self-storage spaces has also shot up in a flexible work environment, an improving housing market, elevated home sales, remodeling and migration in and out of metropolitan markets.
Amid these, Public Storage is poised to benefit from its solid presence in key cities and high brand value. PSA has one of the strongest balance sheets in the sector with adequate liquidity to withstand any challenges and bank on expansion opportunities through acquisitions and developments.
Public Storage currently carries a Zacks Rank #2. The Zacks Consensus Estimate for the 2022 FFO per share moved marginally north to $15.09 over the past week, reflecting positive sentiments. The stock has also rallied 14.5% over the past six months.
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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