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For Immediate Release
Chicago, IL – July 1, 2021 – Today, Zacks Equity Research discusses REIT & Equity Trust, including National Storage Affiliates Trust NSA, OUTFRONT Media Inc. OUT and Mack-Cali Realty Corp. CLI.
Although there has been improvement in the fundamentals of the real estate market compared to 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.
Moreover, investors’ sector rotation sentiments post-vaccine are creating hiccups. 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 the pandemic-triggered industry weakness.
Particularly, with the healthy fundamentals of the digital economy, migration trends, easing of restrictions and prospects for economic growth, National Storage Affiliates Trust, OUTFRONT Media and Mack-Cali Realty Corp are likely to benefit.
About the Industry
The Zacks REIT and Equity Trust - Other industry is a diversified group and covers REIT stocks from different asset categories like industrial, office, lodging, healthcare, self-storage, data centers, towers, infrastructures and others. The Equity REITs rent spaces in these properties to tenants and earn rental incomes in return.
Markedly, economic growth plays a pivotal role for the real estate sector. This is because expansion in the economy translates into greater demand for real estate, higher occupancy levels and landlords’ increased power to ask for higher rents.
Apart from macroeconomic conditions, performance of Equity REITs depends on the underlying asset dynamics and location of properties. Therefore, delving into the fundamentals of these asset categories is all the more essential before making any investment decision.
What's Shaping the Future of the REIT and Equity Trust - Other Industry?
REITs to see asymmetrical recovery across sectors: Although the economy is expected to recover this year, the rebound in the commercial real estate is likely to be imbalanced across sectors, with some sectors lagging the overall economy. Particularly, though situations have improved in the lodging/resorts real estate category, a substantial improvement is unlikely until travel volumes hover nearer the pre-pandemic levels.
In fact, while personal and vacation travel might recover and create demand for lodging spaces, particularly in markets that cater to domestic leisure travelers, business travel will likely be slower to recapture its lost ground, thanks to the online meetings and teleconferences substituting a number of in-person events. Moreover, for the office REITs, the remote-working wave has substantially affected demand for office spaces and this uncertainty is likely to stay at least in the rest half of the current year.
In fact, while a number of firms plan to return to office with the ebb of the health crisis, others intend to adopt a more flexible hybrid model. As of now, the long-term impact of work from home is difficult to determine. This uncertainty is likely to continue affecting demand for office space, lowering occupancy and rent growth. For healthcare REITs, there is still a strain on occupancy level and rate for senior housing assets.
Demand for Real Estates Supporting Digital Economy to Remain Solid: The substantial 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, and help sectors like industrial, infrastructure, and data centers to prosper in the foreseeable future. However, investors’ sector rotation sentiments post-vaccine and tech-driven sell-off might create hiccups.
Moreover, the self-storage REITs continue to benefit as the pandemic-led movement of people and downsizing have resulted in increased demand for storage units, helping occupancy levels reach fresh highs. Nevertheless, a development boom of self-storage units in many markets and a likely rise in move-out rates with the abatement of the pandemic are key concerns.
Economic Recovery, Vaccination and Inflation: Nevertheless, with economic stimulus, higher level of vaccine coverage, easing of pandemic-related restrictions and reopening, the economy is expected to rebound this year. This, in turn, boosts the real estate sector’s prospects because one will eventually need “real space” for economic activities carried out in the real world or through virtual mode. And Equity REITs are well poised to bank on a growing economy.
Rental collections are improving. Also, Equity REITs have entered the crisis with decent balance-sheet strength, liquidity and access to credit. Equity REITs have been proactive in the capital market in recent years as well as opportunistically used the low-rate environment to make financials more flexible, locking the low rates for an elongated period, which is encouraging down the line for their operational efficiencies.
Support from the capital market and focus on M&A activities indicate confidence in this sector. In addition, REITs offer protection from inflation as both rents and valuations get a boost when prices flare up, in turn, supporting cash flows from their properties and driving dividend growth.
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 #206, which places it at the bottom 18% 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. Over the past year, the industry’s FFO per share estimates for 2021and 2022 have moved 6.9% and 9.5% south, respectively.
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 lagged both the S&P 500 composite as well as the broader Zacks Finance sector in a year’s time.
The industry has appreciated 22.3%, during this period, compared with the S&P 500’s rally of 39.9%. Meanwhile, the broader Finance sector has gained 46%.
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 21.79X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.85X. The industry is trading above the Finance sector’s forward 12-month P/E of 16.29X.
Over the last five years, the industry has traded as high as 21.79X, as low as 14.57X, with a median of 16.42X.
3 Equity REIT - Others Stocks Worth Betting On
National Storage Affiliates Trust: This REIT is focused on ownership, operation and acquisition of self-storage facilities situated within the top 100 metropolitan statistical areas throughout the United States. It is poised to gain from the healthy fundamentals of its asset category.
National Storage Affiliates currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the 2021 and 2022 FFO per share moved 4.7% and 5.4% north to $1.99 and $2.13 over the past month, reflecting positive sentiments. The company’s shares have gained 26.6% over the past three months.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
OUTFRONT Media : This REIT is a leading provider of out-of-home (OOH) advertisement space, including billboard, transit, and mobile assets, in key markets in North America. The removal of most restrictions is aiding the advertising environment rebound. Amid this, this Zacks Rank #2 company is well poised to gain from its improving billboard business backed by a solid presence in key markets.
The Zacks Consensus Estimate for 2021 FFO per share of 87 cents calls for year-over-year growth of 29.9%. Moreover, it has a long-term growth rate of 10%, which is well ahead of the industry average of 7.6%. The stock has also rallied 9% over the past three months.
Mack-Cali Realty Corp.: This REIT is engaged in the ownership, management and development of office and multi-family properties in select waterfront and transit-oriented markets throughout New Jersey. This Zacks #2 Ranked company is poised to benefit from its investments in waterfront properties which have enhanced its asset quality and will help capture the growing demand for highly-amenitized office space.
Also, the company’s portfolio-repositioning strategy is focused on capturing the attention of people who prefer to live, work and play in the same area — a trend that drove development in several other cities in the United States.
The Zacks Consensus Estimate for 2021 and 2022 FFO per share have been revised 9.6% and 4.7% upward over the past two months. The stock has appreciated 9.8% over the past three 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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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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MackCali Realty Corporation (CLI) : Free Stock Analysis Report
OUTFRONT Media Inc. (OUT) : Free Stock Analysis Report
National Storage Affiliates Trust (NSA) : Free Stock Analysis Report
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