Encouraging Near-Term Outlook For Equity REIT Stocks
Zacks Investment Research | Sep 25, 2019 08:43AM ET
The Zacks Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates solid 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 top 50% of the Zacks-ranked industries is a result of positive funds from operations (FFO) per share outlook for the constituent companies in aggregate.
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 Leads on Stock Market Performance
The REIT and Equity Trust - Other Industry has outperformed the broader Zacks Finance sector, as well as the Zacks S&P 500 composite in a year’s time.
The industry has rallied 19.7% during this period compared to the S&P 500’s rise of 1.8%. During the same time frame, the broader Finance sector has declined 1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-FFO (funds from operations) ratio, which is a commonly used multiple for valuing REIT - Others, we see that the industry is currently trading at 18.14X compared to the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.07X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.96X. 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 18.94X, as low as 14.24X, with a median of 16.08X.
Bottom Line
In a nutshell, the REIT – Other industry is poised for growth amid stable economy and job-market gains, favorable demographics, technological developments and lifestyle transformations. Nonetheless, the delivery boom in certain asset classes in the near- to mid-term may strain rental rates and result in high concessions.
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In addition to the above, REITs have improved their leverage level over the years. This looks encouraging for their operational efficiencies, as well as for investors, since interest expense may take a smaller bite out of REITs’ earnings. Consequently, dividend yields and profitability for investors are predicted to improve.
Here we present three stocks from the industry with a favorable Zacks Rank that investors may consider adding to their portfolio.
San Francisco, CA-based Prologis, Inc. (PLD) is a leading industrial REIT that acquires, develops, operates and manages industrial properties in the United States and across the globe. The company is poised to excel as the industrial real estate market is witnessing improving fundamentals amid growth of e-commerce business and supply-chain strategy transformations. This Zacks #2 (Buy) Ranked stock has been a steady performer, having beaten the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 1.35%. Reflecting positive sentiments, the stock’s Zacks Consensus Estimate for the current-year FFO per share moved 1.5% north to $3.28 over the past three months.
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