Zacks Industry Outlook Highlights Welltower, Americold Realty and EastGroup Properties
For Immediate Release
Chicago, IL – October 5, 2023 – Today, Zacks Equity Research discusses Welltower WELL, Americold Realty Trust COLD and EastGroup Properties EGP.
Industry: Equity REITs
Link: https://www.zacks.com/commentary/2160084/3-equity-reit-stocks-to-bet-on-despite-industry-hiccups
Despite improvements in the real estate market since the pandemic's onset, concerns loom due to elevated interest rates and economic uncertainty. These factors are impacting leasing activities across various asset categories and dampening the prospects of the REIT and Equity Trust - Other industry.
Even amid this choppiness, pockets of strength exist within the industry, offering real estate solutions for various economic activities, both physical and digital. The growth of the digital economy is expected to drive the continued prosperity of commercial real estate segments like industrial and data centers. An aging U.S. population is anticipated to drive demand for healthcare properties. The resilient demand for food infrastructure is encouraging. Amid these, Welltower, Americold Realty Trust and EastGroup Properties are likely to thrive.
About the Industry
The Zacks REIT and Equity Trust - Other sector comprises a diverse collection of REIT stocks representing various asset categories, including industrial, office, lodging, healthcare, self-storage, data centers, infrastructures and more. Equity REITs lease out space within these properties to tenants, generating income through rental payments.
Economic growth assumes a central role within the real estate sector as economic expansion directly correlates with higher demand for real estate, increased occupancy rates and greater bargaining power for landlords to command higher rental rates. Moreover, the performance of Equity REITs hinges on the specific dynamics of their underlying assets and the geographic location of their properties. Therefore, it is imperative to thoroughly explore the fundamentals of these asset categories before making any investment decisions.
What's Shaping the Future of the REIT and Equity Trust - Other Industry?
Economic Uncertainty to Make It Challenging: Economic growth plays a pivotal role in shaping the demand for real estate properties, and any slowdown is likely to cast a pall on leasing activity and affect rental rate growth and occupancy level. Particularly, the office real estate market is expected to continue to bear the brunt as persistent uncertainty surrounding the economic outlook and long-term hybrid work arrangements are causing a postponement in leasing decisions.
In the case of hotel REITs, there is a slower-than-expected rebound in the pace of inbound international travel to the United States, which is because of fewer visitors from Asia. This, coupled with the effect of the remote work environment, is likely to limit revenue per available room growth in the near term. Moreover, given a choppy economic environment, a fallback in capital funding and a supply increase due to new construction activities, the life science real estate market is likely to experience a moderation from rapid growth in the prior years.
High Interest Rates to Cast a Pall: The near-term outlook for the commercial real estate market is anticipated to be challenging, given higher interest rates and lingering concerns over economic growth. Elevated interest rates pose a significant risk to the availability of capital in this asset class, which is likely to result in volatility in asset prices.
Additionally, compared to other industries, REITs rely more heavily on debt to conduct their business, which has led to investor apprehension about their performance in a high-interest-rate environment. Consequently, it is expected that interest expenses for REITs will rise. Also, as the investment world treats REITs as bond substitutes for their high and consistent dividend-paying nature, these companies are susceptible to the impact of elevated interest rates in the investment landscape.
Certain Asset Categories to Remain Resilient, While Some Rebound: Sectors such as industrial, infrastructure and data centers, which underpin the digital economy, are poised for sustained growth in the foreseeable future. The expansion of e-commerce and supply-chain enhancements will continue to fuel the demand for industrial real estate space. However, the strategic location of properties will be a significant driver of this demand.
The increasing reliance on technology and the rapid adoption of digital transformation strategies by businesses present substantial opportunities for data centers and infrastructure-focused REITs. Particularly in uncertain economic periods, data centers, with their robust and predictable earnings streams compared to other asset classes, are likely to become a preferred choice for investors. For healthcare REITs, the aging of the U.S. population is anticipated to generate robust demand for healthcare properties.
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 #181, which places it in the bottom 26% 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 dull near-term prospects. Our research shows that the top 50% of the 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 a result of the southward revision of 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 year, the industry’s FFO per share estimates for 2023 have declined 6.4%. The same for 2024 has moved 10.3% south over the past year.
However, 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 the 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.
The industry has declined 11.5% during this period against the S&P 500’s increase of 13.8%. Meanwhile, the broader Finance sector has increased 5.9%.
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 13.23X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.18X. However, the industry is trading above the Finance sector’s forward 12-month P/E of 12.70X.
Over the last five years, the industry has traded as high as 22.09X and as low as 13.23X, with a median of 17.82X.
3 REIT and Equity Trust - Other Stocks Worth Betting On
Welltower: Toledo, Ohio-based Welltower is a healthcare REIT that partners with the top senior housing operators, post-acute care providers and health systems and invests in the real estate infrastructure, encompassing senior housing, post-acute care communities and outpatient medical facilities in key growth markets across the United States, Canada and the UK.
Welltower is well-poised to benefit from its diversified portfolio of healthcare real estate assets. Given the continued strength of its senior housing operating portfolio, aided by favorable demographic trends, healthy demand-supply fundamentals, and robust and accretive capital deployment activity, the company recently amped up its current-year normalized funds from operations (FFO) per share guidance. Furthermore, WELL’s portfolio-restructuring efforts and solid balance sheet augur well.
Welltower currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2023 FFO per share has been revised 1.1% north over the past two months to $3.55. It also suggests a 6% increase year over year. The stock has rallied 12.4% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Americold Realty Trust: This Atlanta, GA-based REIT is a global leader in temperature-controlled logistics real estate and value-added services. The company operates in North America, Europe, Asia-Pacific and South America. Its facilities serve as an essential component of the supply chain linking food producers, processors, distributors and retailers to consumers.
With a focus on temperature-controlled warehouses, COLD benefits from the rising demand for cold storage facilities. With the growing trend of e-commerce and the increasing demand for temperature-controlled supply chains, Americold Realty's specialized asset class could offer a defensive play in uncertain times.
COLD currently carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2023 FFO per share of $1.26 calls for a 4.1% increase year over year. The stock has also increased 2.6% in the past six months.
EastGroup Properties: This REIT is engaged in the development, acquisition and operation of industrial properties and focuses on properties in major Sunbelt markets throughout the United States, emphasizing assets in the states of Florida, Texas, Arizona, California and North Carolina.
With its strategy of ownership of high-quality distribution facilities clustered near major transportation features in supply-constrained submarkets, EGP is expected to benefit from the healthy fundamentals of the industrial real estate market.
EastGroup Properties currently carries a Zacks Rank #2. The Zacks Consensus Estimate for EGP’s 2023 FFO per share has moved 1.1% north over the past month to $7.62, calling for an 8.9% increase year over year. The stock has also rallied 8.8% year to date.
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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EastGroup Properties, Inc. (EGP) : Free Stock Analysis Report
Americold Realty Trust Inc. (COLD) : Free Stock Analysis Report
Welltower Inc. (WELL) : Free Stock Analysis Report
