Near-Term Outlook Bleak For Equity REIT Stocks
Zacks Investment Research | Feb 03, 2020 09:38PM ET
The Zacks 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 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 2019 and 2020 moved down 4.7% and 13.2%, 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 Mixed on Stock Market Performance
The REIT and Equity Trust - Other Industry has outperformed the broader Zacks Finance sector but lagged the Zacks S&P 500 composite in a year’s time.
The industry has rallied 12.3% during this period compared with the S&P 500’s rise of 17.5%. During the same time frame, the broader Finance sector has gained 6.3%.
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 18.13X compared to the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.5X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.49X. 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 18.85X, as low as 14.29X, with a median of 16.10X.
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Bottom Line
In a nutshell, despite job-market growth, favorable demographics, technological developments and lifestyle transformations, the delivery boom in certain asset classes in the near- to mid-term might strain rental rates and result in high concessions. Furthermore, chances of robust performances are bleak in the absence of any solid catalyst, after the decent outperformance of the REIT – Other industry in the prior years.
Nonetheless, REITs have reduced their exposure to rate hikes and used the low-rate environment to make their financials more flexible, which is encouraging for operational efficiencies. And despite the overall industry’s gloomy outlook, REITs catering to certain asset categories have prospects to excel. Therefore, we present three stocks from the industry with a favorable Zacks Rank that investors may consider adding to their portfolios amid global uncertainties and slowdown as well as the U.S. presidential election.
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 e-commerce boom and supply-chain strategy transformations. This Zacks #2 (Buy) Ranked stock has been a decent performer, having beaten the Zacks Consensus Estimate in three of the trailing four quarters and meeting in the other, the average positive surprise being 1.75%. In the fourth quarter, the company registered net effective rent growth. Reflecting positive sentiments, the stock’s Zacks Consensus Estimate for the current-year FFO per share moved nearly 1.6% north to $3.72 over the past month.
SL Green Realty Corporation (SLG) primarily engaged in the acquisition, development, ownership, management and operation of commercial real estate properties, mainly office properties, in the New York metropolitan area, especially in Manhattan. This Zacks Rank #2 company came up with positive surprises in terms of FFO per share in three of the preceding four quarters, the average beat being 1.15%. The company’s fourth-quarter results reflected strong leasing activity in the Manhattan portfolio. Also, the trend is estimate revisions indicates an upbeat outlook as the Zacks Consensus Estimate for ongoing-year FFO per share moved nearly 2% north over the past month.
Boston Properties (NYSE:BXP) (BXP) develops, manages, operates, acquires and owns a diverse portfolio of mainly Class A office space in the United States. The company’s properties are primarily concentrated in five markets — Boston, Los Angeles, New York, San Francisco and Washington, DC. It holds a Zacks Rank of 2, at present. This REIT is a decent performer having beaten the Zacks Consensus Estimate with respect to FFO per share in each of the last four quarters, the average beat being 2.06%. In the recently-reported quarter, greater-than-projected portfolio performance, backed by higher occupancy, buoyed results. Additionally, Boston Properties’ Zacks Consensus Estimate for the 2020 FFO per share increased marginally to $7.56 in a week’s 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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