Near-Term Outlook Appears Gloomy For Retail REIT Stocks
Zacks Investment Research | Feb 27, 2020 09:26PM ET
The 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 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 negative 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. Over the past year, the industry’s FFO per share estimate for 2020 and 2021 moved down 4.2% and 0.30%, respectively.
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 Lags on Stock Market Performance
The REIT and Equity Trust - Retail Industry has underperformed the broader Zacks Finance sector, as well as the S&P 500 composite in a year’s time.
The industry has edged down 0.1% during this period compared with the S&P 500’s rally of 11%. During the same time frame, the broader Finance sector has inched up 1.5%.
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 Retail REITs, we see that the industry is currently trading at 14.72X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.81X. However, 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 19.44X, as low as 12.57X, with a median of 15.04X.
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Bottom Line
In a nutshell, with a healthy job market and a resilient domestic economy, consumer confidence continues to grow and paints a favorable picture for consumer spending for the near term and supports the retail REIT industry, in turn. Nonetheless, concerns regarding cash flows of mall landlords amid declining mall traffic, store closures and retailers’ bankruptcy filing, will likely prevail. Of course, though retail REITs’ efforts to boost productivity of retail assets by grabbing attention from new and productive tenants, and disposing the non-productive ones are commendable, huge outlays will keep eroding any near-term gain.
Currently, there are no stocks with a Zacks Rank # 1 (Strong Buy) or 2 (Buy). Nevertheless, as REITs strive to bring their mojo back, we handpick three stocks from the industry with a Zacks Rank of 3 (Hold) to watch for.
Realty Income Corporation (O): The REIT is engaged in acquisition and management of freestanding commercial properties that generate rental revenues under long-term net lease agreements. It derives more than 90% of its annualized retail rental revenues from tenants belonging to service, non-discretionary and low-price retail businesses. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing. Along with its well-known commercial tenants, investors might love the fact that the firm pays a monthly dividend. This REIT’s current-year FFO per share consensus estimate of $3.51 indicates a projected year-over-year increase of 5.7%. Revenues are expected to be up 12.5% year on year to $1.68 billion in 2020.
National Retail Properties, Inc. (NNN): This retail REIT is based in Orlando, FL, and invests in high-grade retail properties subject usually to long-term, net leases. The current-year FFO per share consensus estimate of $2.87 indicates an estimated increase of 4% year over year. Revenues are expected to grow 6.3% year on year to $711.6 million in the ongoing year.
STORE Capital Corporation (STOR): This net-lease REIT based in Scottsdale, AZ, is engaged in the acquisition, investment and management of Single Tenant Operational Real Estate (STORE properties). The company’s 2020 consensus estimate for FFO per share of $2.02, suggests an uptick of 1.5% year on year, while the revenue estimate of $707.3 million indicates 13.1% growth during the same time period.
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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