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Zacks Analyst Interviews

With the mortgage-related credit crisis opening a new chapter in the latter part of last week, we thought it would be a good time to hunt for bargains in real estate investment trusts [REITs], assuming there are any out there. Zacks senior REIT industry analyst Greg Sukenik helped guide us through the war zone.

We know much of the real estate industry is hard-hit by the mortgage crisis. But are there any REITs out there worth buying?

Sure there are. Just a couple weeks back I reissued a Buy report on Regency Centers (REG - Analyst Report), which is based in Jacksonville, Florida and is one of the leading owners, operators, and developers of grocery-anchored retail shopping centers in the U.S.

Due to recent share price declines, the company’s valuation remains compelling, and we think grocery-anchored retail companies will fare well, even as discretionary retail spending subsides in the coming quarters. This is because they are a segment that is much less affected by economic downturns.

REG has a solid balance sheet, and is well positioned to take advantage as private developers have difficulty obtaining financing for new projects.

This company remains strong with financing capabilities?

Yes. In general, well-capitalized REITs will have an advantage in the current liquidity constrained environment as more private developers have trouble obtaining financing for developments and acquisitions. In Regency’s case, its portfolio is concentrated in high growth, affluent areas of the country.

Can you tell us about another Buy recommendation you have issued recently?

Equity Residential (EQR)

continues to raise rents in most markets, which has led to above-average revenue and NOI [net operating income] growth in EQR’s portfolio. Nearly all of EQR’s top 20 markets reported solid rental rate growth in the 1st quarter.

Also, EQR continues to dispose of assets in lower growth areas to focus on higher growth assets in more supply constrained markets. In addition, EQR’s large development pipeline should incrementally add to earnings as projects come on line.

How long do you think this sub-sector will remain strong?

We think multifamily fundamentals will remain strong throughout 2008, a byproduct of the failing housing markets. We would overweight multifamily operators in the current recessionary economic environment.

What is your overall outlook for the REIT sector, in general?

Our outlook for the publicly-traded real estate industry is neutral. After a rough 2007, equity REITs as a group are down 3.59% so far in 2008 (total return NAREIT equity REIT index through 6/30/2008). Bad economic news and a prolonged credit crunch brought down REIT prices in late 2007 and now 2008.

Investors can now finding bargains in a much cheaper sector, and on average, REITs are trading at a discount to NAV [net asset value].

Despite the slowdown in residential housing, operating fundamentals for commercial real estate are still good and loan delinquencies are relatively low. We expect this to continue in 2008, although, we expect delinquencies to slightly increase throughout the year due to a slumping economy.

Greg Sukenik is a senior analyst covering the REIT industry for Zacks Equity Research.

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