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Zacks Industry Outlook Highlights: LGI Homes, Green Brick Partners and Forestar Group

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·9 min read
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  • LGIH
  • GRBK
  • FOR
  • ^GSPC

For Immediate Release

Chicago, IL – April 28, 2021 – Today, Zacks Equity Research discusses Real Estate - Development, including LGI Homes, Inc. LGIH, Green Brick Partners, Inc. GRBK and Forestar Group Inc. FOR.

Link: https://www.zacks.com/commentary/1461349/3-top-stocks-from-the-thriving-real-estate-development-industry

Values of a number of property types, including industrial and apartment, have been moving higher, while the pace of deterioration in other asset categories has considerably moderated. This improvement in commercial real estate values is being supported by economic recovery and decent demand.

The Zacks Real Estate – Development industry is poised to tap these tailwinds with ample availability of capital for real estate investment. Also, real estate developers striving toward digital transformation at job sites and back office will go a long way in enhancing operational resilience.

In addition, the behavioral changes of consumers induced by the pandemic offer a scope to reconsider the optimal usage of real estate. Stocks including  LGI HomesGreen Brick Partners and Forestar Group will benefit from the scenario.

About the Industry

The Zacks Real Estate – Development industry includes companies that are mainly engaged in owning, developing and managing a variety of real estate properties, including commercial, residential and mixed-use parcels. While some developers undertake construction on their land holdings to eventually sell the properties to homebuilders, retaining the same for conducting operations is also a common practice. Operations of these properties provide recurring revenue sources for companies.

Moreover, some industry participants actively undertake strategic activities such as infrastructure improvement along with land planning and development to promote economic development, attract quality job creators and diversify the regions in which the companies operate. These firms also provide real estate leasing, stewardship, underwriting, planning and entitlement services.

Before we delve into the details of the industry, it is worth noting that real estate development companies are primarily classified as financial ones, not construction firms.

What’s Shaping the Future of the Real Estate Development Industry?

Improving Real Estate Market Offers Scope for Growth: More than a year into the pandemic-induced mayhem, values of a number of property types have been moving higher, contrary to the expectations of a drop.The pace of U.S. commercial property price growth is likely to continue in the upcoming period backed by strong government’s policy, robust demand, and huge availability of capital for real estate investment.

Per The American Jobs Plan, the Biden administration has proposed to spend around $2 trillion over the next decade. This includes $213 billion for housing infrastructure aimed to build stronger communities. The primary motive is to “build, preserve, and retrofit more than two million homes and commercial buildings to address the affordable housing crisis.”

Moreover, economic recovery will support demand and asset value appreciation of commercial real estate. This offers ample opportunity to real estate developers to continue undertaking new projects.

Digital Transformation Efforts to Optimize Operations: The pandemic has accelerated the pace of technological adoption by real estate development firms for the job site and in the back office. Amid social distancing norms, many companies quickly resorted to new model home practices by offering 3D virtual tours and live chat features with sales staff as well as increased photographs on websites. Such digital sales efforts will go a long way in enhancing tenant experience and operational resilience.  

Evolution of Real Estate Use to Drive Development Activities: Real estate developers are well-poised to capitalize on the behavioral changes influenced by the pandemic. The rise of e-commerce is compelling property owners to reconsider the use of retail properties. The urban exodus and surge in home buying activities in sub-urban markets will likely be a multi-year tailwind.

Also, despite the narrative that remote working is likely to axe office-space needs, flight-to-quality might accelerate development activities. In fact, occupiers are increasingly demanding flexible work spaces and amenities such as shared meeting space, improved indoor air quality and touch-less technologies. Hence, despite rising lumber costs, we do not anticipate a reduction in development activities.

Zacks Industry Rank Indicates Encouraging Prospects

The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #39, which places it in the top 15% 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 impressive 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident in this group’s earnings growth potential. Since April 2020, the industry’s earnings estimates for the current year have been significantly revised upward.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Real Estate – Development industry has outperformed the S&P 500 composite and the broader Finance sector over the past year.

The industry has surged 94% during this period compared with the S&P 500 composite’s rally of 49.1% and the broader Finance sector’s growth of 47.2%.

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is a commonly used multiple for valuing real estate development companies, we see that the industry is currently trading at 12.49X compared with the S&P 500’s 22.99X. The industry is trading below the Finance sector’s forward 12-month P/E of 16.82X.

Over the past five years, the industry has traded as high as 34.29X and as low as 6.73X, with a median of 19.39X.

3 Real Estate Development Stocks Worth Betting On

LGI Homes: The company engages in the design, construction and sale of homes in the United States. It is the 10th largest residential builder in the nation and closed more than 45,000 homes over 17 years of homebuilding operations. The ongoing surge in demand for affordable new housing backed by low mortgage rates is likely to drive its unit sales in the near term.

LGI Homes carries a Zacks Rank #2 (Buy), at present. The Zacks Consensus Estimate for 2021 EPS has been revised 1.4% upward to $12.03 over the past month. It indicates year-over-year growth of 3.8%. Moreover, the consensus mark for 2021 revenues is pegged at $2.6 billion, indicating year-over-year growth of 11.7%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Green Brick Partners: This publicly-traded company operates as a homebuilding and land-development provider. The company has been benefiting from location of its properties in reasonable price-point neighborhoods in most diversified growth markets across the country.

The company also benefits by offering a product portfolio that is well-diversified across a wide price range, including single family homes, townhomes, luxury homes, patio homes and condominiums.

It currently carries a Zacks Rank of 2. The consensus estimate for EPS of $3.05 implies 36.2% year-over-year growth for the ongoing year. Further, it is expected to register revenue growth of 31.5% in 2021.

Forestar Group: This residential lot development company focuses on investments in land acquisition and development. The major portion of the company’s real estate projects is single-family residential communities. Higher mobility rates among younger generations and demographic shifts (aging of U.S. baby boomers) have resulted in supply shortage of single-family homes, thereby propelling development opportunities to Forestar Group.

It sports a Zacks Rank of 1 at present. The Zacks Consensus Estimate for fiscal 2021 EPS has been revised 12.6% upward to $1.97 over the past week, indicating a 62.8% year-over-year increase. Further, its top line is expected to register year-over-year growth of 33.7% in fiscal 2021.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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