3 Equity REIT Stocks To Bet On Despite Industry Weakness

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Despite an improvement in the fundamentals of the real estate market from the onset of the pandemic, there are concerns stemming from rate hikes and the potential of an economic slowdown. These factors are affecting the leasing activity of several asset categories and hurting the REIT and Equity Trust - Other industry’s overall prospects.

However, with the industry offering the real estate structure for several economic activities, be it real or virtual, there are pockets of strength even in this challenging environment. Particularly, with the growth of the digital economy, commercial real estates like industrial and data centers, which support the industry, are likely to continue prospering in the foreseeable future.

Also, resilient demand for food infrastructure and easing travel restrictions are encouraging. Against this backdrop, VICI Properties Inc. (VICI - Free Report), Americold Realty Trust, Inc. (COLD - Free Report), and EastGroup Properties, Inc. (EGP - Free Report) are likely to prosper.

About the Industry

The Zacks REIT and Equity Trust - Other industry is a diversified group that covers REIT stocks from different asset categories like industrial, office, lodging, healthcare, self-storage, data centers, infrastructures, and others.

Equity REITs rent spaces in these properties to tenants and earn rental incomes. Economic growth plays a pivotal role in the real estate sector as economic expansion translates into greater demand for real estate, higher occupancy levels, and landlords’ increased power to ask for higher rents.

Also, the performance of Equity REITs depends on the underlying asset dynamics and location of properties. So, delving into the fundamentals of these asset categories is essential before making any investment decision. It is important to figure out whether the pandemic-induced behaviors result in only a short-term impact or long-term structural changes.

What's Shaping the Future of the REIT and Equity Trust - Other Industry?

  • Slowing Economy to Make It Challenging: The REIT industry constituents have been facing headwinds from a softening of the economy in the current year. Economic growth plays a pivotal role in shaping the demand for real estate properties, and a slowing economy is likely to cast a pall on leasing activity as well as affect rental rate growth and occupancy level.
  • High Interest Rates to Cast a Pall: The commercial real estate market is likely to remain challenging in the near-term, given higher interest rates, lingering concerns over economic growth, and the banking crisis. High interest rates pose a risk to the flow of capital for this asset category. This is likely to lead to volatility in asset prices. Moreover, the dependence of REITs on debt for business is more compared to the other industries, making investors skeptical about their performance, with interest rates being high. Therefore, interest expenses are expected to climb. Also, as the investment world treats REITs as bond substitutes for their high and consistent dividend-paying nature, these companies are susceptible to rising rates.
  • Some Asset Categories to Continue to Bear the Brunt: The demand for a number of asset categories is likely to remain choppy in the near-term. Particularly, the office real estate market usually performs below par in recessionary environments. Moreover, the widespread adoption of hybrid work continues. The demand for high-quality and well-located office buildings with employee well-being and productivity-enhancing amenities is likely to surge. However, older buildings with outmoded facilities will find it difficult to lure tenants, in turn affecting the overall office vacancy rate. Moreover, given a choppy economic environment, a fallback in capital funding, and supply increase owing to new construction activities, the life science real estate market is likely to experience a moderation from rapid growth in the prior years.
  • Certain Asset Categories to Remain Resilient While Some Rebound: Sectors like industrial, infrastructure, and data centers, which support the digital economy, are likely to continue prospering in the foreseeable future. Demand for industrial real estate space should continue to be driven by growth in e-commerce and supply-chain transformations. Also, the location of properties will play a key role in driving demand. Growing reliance on technology and acceleration in digital transformation strategies by enterprises are offering immense opportunities to data centers and infrastructure REITs. Particularly, in uncertain periods, with a more resilient and predictable stream of earnings compared to the other asset categories, data centers are likely to gain preference among investors. Moreover, the lodging and resort sector, which was hard-hit by the pandemic, is expected to continue rebounding with the waning of pandemic concerns and easing of travel restrictions.

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 #166, which places it at the bottom 34% 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 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 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%. The same for 2024 has moved 13.4% 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 on 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’s time. The industry has declined 14.9% during this period against the S&P 500’s increase of 2.7%. Meanwhile, the broader Finance sector has declined 3.5%.

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 14.84X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.37X. However, the industry is trading above the Finance sector’s forward 12-month P/E of 12.90X. This is illustrated 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 14.25X, with a median of 17.73X.

3 Equity REIT - VICI Properties Inc. 

New York-based VICI Properties Inc. is an experiential REIT engaged in the business of owning, acquiring, and developing gaming, hospitality, and entertainment destinations.

VICI Properties enjoys the ownership of three of the most iconic entertainment facilities on the Las Vegas Strip, namely Caesars Palace Las Vegas, MGM Grand, and the Venetian Resort Las Vegas. The company has made concerted efforts to grow its portfolio and team up with the best-in-class tenants. Such efforts are likely to aid VICI’s performance in the coming quarters.

VICI currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for VICI Properties’ 2023 funds from operations per share of $2.13 calls for a 10.36% increase year-over-year. The stock has inched up 0.9% 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.

As the world's largest publicly traded REIT focused on temperature-controlled warehouses, COLD benefits from the rising demand for cold storage facilities. In fact, with the growing trend of e-commerce and increasing demand for temperature-controlled supply chains, COLD's specialized asset class could offer a defensive play in uncertain times.

COLD currently carries a Zacks Rank #2. The Zacks Consensus Estimate for COLD’s 2023 FFO per share of $1.19 calls for a 7.21% increase year-over-year. The stock has also rallied 5.2% 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.

EGP currently carries a Zacks Rank #2. The Zacks Consensus Estimate for EGP’s 2023 FFO per share has moved 1.2% north over the past month to $7.53, calling for a 7.6% increase year-over-year. The stock has also rallied 7.3% in the past six months.

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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 ...

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