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3 Equity REIT Stocks Worth Betting on Despite Industry Woes
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Even though Fed’s latest decision to keep interest rates steady brings cheer to REIT investors, broad-based economic uncertainty remains a key concern for the REIT and Equity Trust - Other industry. An expected slowdown in leasing demand is anticipated to dampen the prospects of the industry, while supply-chain constraints and high material costs may raise development costs.
Given this backdrop, investors should consider betting on defensive asset categories within the industry that portray resiliency and have solid fundamentals that will drive growth. Players like EastGroup Properties (EGP - Free Report) , Stag Industrial (STAG - Free Report) and Park Hotels & Resorts (PK - Free Report) are likely to prosper.
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?
Broad-Based Economic Uncertainty to Hurt Near-Term Large-Scale Deals: Although the Federal Reserve kept the benchmark rate unchanged for the third time in a row and indicated three rate cuts in 2024, near-term investors are likely to remain cautious, especially about large-scale business deals. There is less urgency from clients to make new commitments, and they continue to await greater price discovery. This phenomenon, along with persistent broad-based macroeconomic uncertainty, is expected to lower leasing demand and limit rental rate and occupancy growth. Specifically, the overall office real estate market is expected to continue experiencing lackluster demand as work-from-home and flexible or hybrid work setups take the front foot, diminishing office space utilization. As for lodging REITs, the recovery in group and business transient travel demand has been slower than anticipated. However, a positive demand trend and improvement in international inbound travel provide scope for revenue per available room growth in the near term, although at a slower pace. Further, with the initial surge in tower activity related to the early stage of the 5G investment cycle coming to a temporary halt and consolidation in the wireless industry, demand for tower REITs is expected to mellow down in the quarters ahead, hurting profitability.
Supply-Chain Woes & High Material Costs Linger: Overall economic uncertainty and geopolitical unrest continue to lead to supply-chain constraints at various stages. This, coupled with elevated interest rates, has pushed up the cost of raw materials, resulting in higher development costs. In addition, REITs are highly dependent on the debt market to carry out their development and redevelopment activities. As a result, interest expenses are likely to be on the higher end in the near term, affecting their ability to purchase or develop real estate with borrowed funds.
Resilient Demand Across Certain Asset-Classes Gives Scope for Growth: Demand for certain asset categories such as healthcare, data centers and industrial and logistics is likely to remain resilient in the near future. Healthcare REITs are well-poised to capitalize on the expected acceleration in senior citizens’ population and a rise in healthcare spending by this age cohort in the upcoming period. On the other hand, the e-commerce boom and supply-chain strategy transformations continue to provide an impetus to the industrial and logistics real estate space. Further, in this digital era, the high demand for inter-connected data center space by enterprises and service providers continues as they integrate artificial intelligence into their strategies and offerings, and advance their digital transformation agendas. This enhances the growth prospects for data center REITs.
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 #153, which places it in the bottom 39% 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 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. For 2023, the industry’s earnings estimates have moved 1.9% downward since January 2023 end. The industry’s estimates for 2024 have moved 7.7% south during this time frame.
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 and the broader Zacks Finance sector in a year.
The industry has risen 6% during this period compared with the S&P 500’s increase of 24% and the broader Finance sector’s 16.3% jump.
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 15.67X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.75X. However, the industry is trading above the Finance sector’s forward 12-month P/E of 14.80X. 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 22.10X and as low as 12.80X, with a median of 17.79X.
3 REIT and Equity Trust - Other Stocks to Consider
Park Hotels & Resorts: The lodging REIT owns a high-quality portfolio of hotels situated mostly in major urban and convention areas and premier resorts in key leisure destinations. Notably, 86% of the hotels and resorts are in the luxury or upper upscale segment. With economic activity picking up pace, the company continues to witness improvement in overall demand across its portfolio. It expects this positive momentum to continue through the remainder of 2023 and into 2024.
PK currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the company’s 2023 FFO per share has been raised marginally over the past month to $1.99, indicating an increase of 29.2% year over year. The stock has gained 38.8% in the year-to-date period. You can see the complete list of today’s Zacks #1 Rank stocks here.
EastGroup Properties: This industrial REIT is engaged in the acquisition, development and operation of industrial properties, the majority of which are clustered around key transportation hubs in supply-constrained submarkets of major Sunbelt regions. Its core markets include the states of Florida, Texas, Arizona, California and North Carolina. Given the strategic location of EGP’s high-quality distribution facilities, it is expected to benefit from the healthy fundamentals of the industrial real estate market.
EastGroup Properties currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for EGP’s 2023 FFO per share has moved marginally northward over the past two months to $7.70, indicating an increase of 10% year over year. The stock has rallied 24.3% in the year-to-date period.
Stag Industrial: The company is engaged in the acquisition, ownership and operation of industrial properties throughout the United States. It enjoys a diversified portfolio in terms of market, tenant industry and tenant credit, which is likely to help it tide through the current market conditions and aid in stabilizing rental revenues.
The REIT currently carries a Zacks Rank #2. The Zacks Consensus Estimate for STAG’s 2023 FFO per share has been raised 1.3% over the past two months to $2.28, indicating an increase of 3.2% year over year. The stock has appreciated 19.7% in the year-to-date period.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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3 Equity REIT Stocks Worth Betting on Despite Industry Woes
Even though Fed’s latest decision to keep interest rates steady brings cheer to REIT investors, broad-based economic uncertainty remains a key concern for the REIT and Equity Trust - Other industry. An expected slowdown in leasing demand is anticipated to dampen the prospects of the industry, while supply-chain constraints and high material costs may raise development costs.
Given this backdrop, investors should consider betting on defensive asset categories within the industry that portray resiliency and have solid fundamentals that will drive growth. Players like EastGroup Properties (EGP - Free Report) , Stag Industrial (STAG - Free Report) and Park Hotels & Resorts (PK - Free Report) are likely to prosper.
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?
Broad-Based Economic Uncertainty to Hurt Near-Term Large-Scale Deals: Although the Federal Reserve kept the benchmark rate unchanged for the third time in a row and indicated three rate cuts in 2024, near-term investors are likely to remain cautious, especially about large-scale business deals. There is less urgency from clients to make new commitments, and they continue to await greater price discovery. This phenomenon, along with persistent broad-based macroeconomic uncertainty, is expected to lower leasing demand and limit rental rate and occupancy growth. Specifically, the overall office real estate market is expected to continue experiencing lackluster demand as work-from-home and flexible or hybrid work setups take the front foot, diminishing office space utilization. As for lodging REITs, the recovery in group and business transient travel demand has been slower than anticipated. However, a positive demand trend and improvement in international inbound travel provide scope for revenue per available room growth in the near term, although at a slower pace. Further, with the initial surge in tower activity related to the early stage of the 5G investment cycle coming to a temporary halt and consolidation in the wireless industry, demand for tower REITs is expected to mellow down in the quarters ahead, hurting profitability.
Supply-Chain Woes & High Material Costs Linger: Overall economic uncertainty and geopolitical unrest continue to lead to supply-chain constraints at various stages. This, coupled with elevated interest rates, has pushed up the cost of raw materials, resulting in higher development costs. In addition, REITs are highly dependent on the debt market to carry out their development and redevelopment activities. As a result, interest expenses are likely to be on the higher end in the near term, affecting their ability to purchase or develop real estate with borrowed funds.
Resilient Demand Across Certain Asset-Classes Gives Scope for Growth: Demand for certain asset categories such as healthcare, data centers and industrial and logistics is likely to remain resilient in the near future. Healthcare REITs are well-poised to capitalize on the expected acceleration in senior citizens’ population and a rise in healthcare spending by this age cohort in the upcoming period. On the other hand, the e-commerce boom and supply-chain strategy transformations continue to provide an impetus to the industrial and logistics real estate space. Further, in this digital era, the high demand for inter-connected data center space by enterprises and service providers continues as they integrate artificial intelligence into their strategies and offerings, and advance their digital transformation agendas. This enhances the growth prospects for data center REITs.
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 #153, which places it in the bottom 39% 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 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. For 2023, the industry’s earnings estimates have moved 1.9% downward since January 2023 end. The industry’s estimates for 2024 have moved 7.7% south during this time frame.
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 and the broader Zacks Finance sector in a year.
The industry has risen 6% during this period compared with the S&P 500’s increase of 24% and the broader Finance sector’s 16.3% jump.
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 15.67X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.75X. However, the industry is trading above the Finance sector’s forward 12-month P/E of 14.80X. 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 22.10X and as low as 12.80X, with a median of 17.79X.
3 REIT and Equity Trust - Other Stocks to Consider
Park Hotels & Resorts: The lodging REIT owns a high-quality portfolio of hotels situated mostly in major urban and convention areas and premier resorts in key leisure destinations. Notably, 86% of the hotels and resorts are in the luxury or upper upscale segment. With economic activity picking up pace, the company continues to witness improvement in overall demand across its portfolio. It expects this positive momentum to continue through the remainder of 2023 and into 2024.
PK currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the company’s 2023 FFO per share has been raised marginally over the past month to $1.99, indicating an increase of 29.2% year over year. The stock has gained 38.8% in the year-to-date period. You can see the complete list of today’s Zacks #1 Rank stocks here.
EastGroup Properties: This industrial REIT is engaged in the acquisition, development and operation of industrial properties, the majority of which are clustered around key transportation hubs in supply-constrained submarkets of major Sunbelt regions. Its core markets include the states of Florida, Texas, Arizona, California and North Carolina. Given the strategic location of EGP’s high-quality distribution facilities, it is expected to benefit from the healthy fundamentals of the industrial real estate market.
EastGroup Properties currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for EGP’s 2023 FFO per share has moved marginally northward over the past two months to $7.70, indicating an increase of 10% year over year. The stock has rallied 24.3% in the year-to-date period.
Stag Industrial: The company is engaged in the acquisition, ownership and operation of industrial properties throughout the United States. It enjoys a diversified portfolio in terms of market, tenant industry and tenant credit, which is likely to help it tide through the current market conditions and aid in stabilizing rental revenues.
The REIT currently carries a Zacks Rank #2. The Zacks Consensus Estimate for STAG’s 2023 FFO per share has been raised 1.3% over the past two months to $2.28, indicating an increase of 3.2% year over year. The stock has appreciated 19.7% in the year-to-date period.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.