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Equity REIT Stocks Outlook Mixed Amid Coronavirus Scare

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The Zacks REIT and Equity Trust - Other industry is a diversified group, covering REIT stocks from different asset classes like industrial, office, lodging, healthcare, self-storage, data centers, towers and others. The REITs rent spaces in these properties to tenants and earn rental incomes.

Some prominent players in the industry are infrastructure REITs American Tower Corp. AMT, Crown Castle International CCI and SBA Communications Corp. (SBAC - Free Report) , data-center REITs Digital Realty Trust DLR and Equinix, Inc. EQIX, industrial REIT Prologis Inc. (PLD - Free Report) , Duke Realty Corporation DRE, self-storage REIT Public Storage (PSA - Free Report) and Extra Space Storage Inc. EXR, diversified REIT Vornado Realty Trust (VNO - Free Report) , specialty REIT Iron Mountain (IRM - Free Report) , office REIT Alexandria Real Estate Equities, Inc. ARE, Boston Properties, Inc. BXP, SL Green Realty Corp. (SLG - Free Report) , healthcare REITs like Healthpeak Properties, Inc. (PEAK - Free Report) , Ventas, Inc. (VTR - Free Report) , and Welltower, Inc. (WELL - Free Report) , and lodging REIT Host Hotels & Resorts (HST - Free Report) .

Let’s take a look at the industry’s three major themes:

Technological evolution has been playing a key role in transforming the real estate market dynamics and spurring demand in a number of asset categories. Furthermore, there is a heightening reliance on technology in the wake of the coronavirus pandemic. The e-commerce boom has been significantly fueling demand for logistics facilities, besides backing cell towers and data centers. The virus outbreak has also resulted in an acceleration of consumer adoption of e-commerce. Further, rapid growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure are stoking demand for data-center REITs. Also, the work-from-home wave is driving near-term demand. Additionally, 5G network deployments have been benefiting tower REITs. Demand for life-science real estate has been picking up with effective diagnostics, testing, therapies and vaccines being required to fight the pandemic. Apart from the fast adoption of e-commerce, logistics real estate is anticipated to benefit from a likely increase in inventory levels over the long term as well. Further, focus on de-densification amid social-distancing requirements will likely propel demand for office space.

Nevertheless, there is uncertainty and volatility in the current economic and capital-market environment and demand for real estate space might be hurt in the days to come. Although the retention rate is high, growth in rents for renewals is considerably low. In addition, though renewals are taking place, new leasing activity has been significantly affected, which might dent REITs’ performance. Furthermore, stress on tenants’ financial capacity is expected to cause rent collection issues. Therefore, REITs with a better balance-sheet position and ample liquidity are well poised to sail through the challenging times and bank on the solid opportunities. Additionally, initial lease-up of new deliveries might be challenging in the near term, and rent discounting and use of concessions will be rampant. Nevertheless, supply-chain disruptions and inability to use full-construction staff in the current scenario might cause delays in deliveries to some extent.

Finally, after imposing shelter-in-place orders, travel restrictions and business shutdowns to contain the spread of coronavirus, states are now gearing up to roll out relaxations on certain activities and businesses. With the resumption of business activities, at a gradual pace, cash flow will recommence, helping tenants generate revenues and meet their rent payments. This is likely to bring down the pressure on commercial real estate landlords and boost their rent-collection figures.

Mixed Earnings Outlook

Looking at the aggregate funds from operations (FFO) per share estimate revisions, it appears that the earnings outlook is mixed, reflecting the pandemic’s broader impact on the economy.

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 Mixed on Stock Market Performance

The REIT and Equity Trust - Other Industry has outperformed the broader Zacks Finance sector but lagged the S&P 500 composite in a year’s time.

The industry has depreciated 2.9%, during this period, as against the S&P 500’s rally of 9.8%. Meanwhile, the broader Finance sector has lost 10.4%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of 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 19.24X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 22.55X. The industry is trading above the Finance sector’s forward 12-month P/E of 17.04X. 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 19.24X, as low as 14.32X, with a median of 16.04X.

Bottom Line

In a nutshell, despite the macroeconomic uncertainties due to the coronavirus crisis and overall weakness in earnings, a number of REITs displayed solid operating performance and robust financial positions entering into the second quarter. The occupancy level has been healthy, and REITs have used the low-rate environment to make their financials more flexible as well as extended their maturities, besides raising a lot of capital. Moreover, REITs catering to certain asset categories have stellar prospects.

Therefore, we present three stocks from the industry sporting a Zacks Rank of 1 (Strong Buy) that investors can consider adding to their portfolios.

Alexander & Baldwin, Inc. ALEX, based in Hawaii, is the largest owner of grocery-anchored, neighborhood shopping centers in the state. Further, its portfolio has industrial assets, office properties, as well as ground leases. The Zacks Consensus Estimate for the 2020 FFO per share moved north to 83 cents over the past two months, reflecting positive sentiment.

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

Farmland Partners Inc. (FPI - Free Report) , based in Denver, CO, owns and seeks to acquire high-quality farmlands located in agricultural markets throughout North America. The company also grants loans to farmers secured by farm real estate. The Zacks Consensus Estimate of 24 cents for the current-year FFO per share suggests an increase of 84.6%, year on year.

One Liberty Properties, Inc. (OLP - Free Report) , based in Great Neck, NY, is into acquisition, ownership and management of a diversified portfolio consisting primarily of industrial, retail, restaurant, health and fitness and theater properties, with many of its properties subject to long-term net leases. The Zacks Consensus Estimate for the ongoing year’s FFO per share has been revised 2.2% upward in two months’ time.

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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