Chicago, IL – March 15, 2024 – Today, Zacks Equity Research discusses Iron Mountain Inc. IRM, Host Hotels & Resorts, Inc. HST and Gladstone Commercial Corp. GOOD.
Industry: Equity REITs
Link: https://www.zacks.com/commentary/2240759/3-equity-reit-stocks-worth-betting-on-despite-industry-hiccups
The REIT and Equity Trust - Other industry constituents are likely to be affected by the uncertain business environment. Following the recent job report and inflation data, the Fed is likely to continue the cautious approach to lowering interest rates in the short term. Amid this, REITs’ interest expenses are likely to remain elevated in the near term. Moreover, supply-chain constraints and high material costs may raise development costs.
Given this backdrop, investors should consider betting on defensive asset categories within the industry that portray resiliency and have solid fundamentals that will drive growth. Players like Iron Mountain Inc., Host Hotels & Resorts, Inc. and Gladstone Commercial Corp. are likely to prosper.
The Zacks REIT and Equity Trust - Other sector comprises a diverse collection of REIT stocks representing various asset categories, including industrial, office, lodging, healthcare, self-storage, data centers, infrastructures and more. Equity REITs lease out space within these properties to tenants, generating income through rental payments.
Economic growth assumes a central role within the real estate sector as economic expansion directly correlates with higher demand for real estate, increased occupancy rates and greater bargaining power for landlords to command higher rental rates. Moreover, the performance of Equity REITs hinges on the specific dynamics of their underlying assets and the geographic location of their properties. Therefore, it is imperative to thoroughly explore the fundamentals of these asset categories before making any investment decisions.
Economic Uncertainty to Hurt Activity in the Near Term: An uncertain business environment is likely to affect occupier sentiment. Investors are expected to maintain a cautious approach in the near term, especially regarding significant business transactions. Clients are exhibiting reduced urgency in making new commitments and are still waiting for further price discovery.
Asset-category-wise, though continued job expansion is expected to boost demand for office space, leasing activity is likely to be affected amid hybrid work setups and ongoing uncertainty in the broader business climate. In the self-storage asset category, there is new customer price sensitivity, and this headwind from lower new customer rates is likely to affect these REITs’ performance in the near term. Further, given that the initial surge in tower activity related to the early stage of the 5G investment cycle has peaked, demand for tower REITs is expected to mellow down in the quarters ahead, hurting profitability.
Supply-Chain Woes & High Material Costs Linger: Overall economic uncertainty and geopolitical unrest continue to lead to supply-chain constraints at various stages. This, coupled with elevated interest rates, has pushed up the cost of raw materials, resulting in higher development costs. In addition, REITs are highly dependent on the debt market to carry out their development and redevelopment activities.
Also, following the recent job report and inflation data, the Federal Reserve is likely to continue adhering to the cautious approach to lowering interest rates in the short term. As a result, interest expenses are still likely to be on the higher end in the near term, affecting their ability to purchase or develop real estate with borrowed funds. Further, with high interest rates still in place, the dividend payout of REITs might seem less attractive than the yields on fixed-income and money market accounts.
Resilient Demand Across Certain Asset Classes Gives Scope for Growth: Demand for certain asset categories is likely to remain healthy in the near term. Expected acceleration in the senior citizen population and a rise in healthcare spending by this age cohort in the upcoming period, as well as pent-up demand for medical services, augur well for Healthcare REITs’ medical property demand.
Meanwhile, the e-commerce boom and supply-chain strategy transformations have continued to provide an impetus to the industrial and logistics real estate space over the past years. Though there has been some cool-off in the warehouse and the manufacturing sectors, the healthy labor market is likely to keep U.S. consumers strong and keep demand for industrial real estate healthy.
For hotels, the scenario seems encouraging as growth in income is likely to support consumer spending and keep leisure demand steady. Also, with a continued improvement in the group business and a steady recovery in the business transient, the operating environment is likely to be stable.
Further, in this digital era, there is high demand for inter-connected data center space, with enterprises and service providers continuing to integrate artificial intelligence into their strategies and offerings and advance their digital transformation agendas. This will enhance growth prospects for data center REITs.
The Zacks REIT and Equity Trust - Other industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #143, which places it in the bottom 43% 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 dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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. For 2024, the industry’s FFO per share estimates have moved 5.8% south over the past year. The industry’s estimates for 2025 have moved 13.8% south during this time frame.
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.
The REIT and Equity Trust - Other Industry has underperformed both the S&P 500 composite and the broader Zacks Finance sector in a year.
The industry has risen 4.5% during this period compared with the S&P 500’s increase of 32.9% and the broader Finance sector’s 27.6% jump.
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 15.37X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.18X. The industry is also trading below the Finance sector’s forward 12-month P/E of 15.48X.
Over the last five years, the industry has traded as high as 21.78X and as low as 12.61X, with a median of 17.51X.
Iron Mountain Incorporated: This REIT provides records & information management services and data center space & solutions. Its offerings include digital transformation, data centers, secure records storage, information management, asset lifecycle management, secure destruction and art storage and logistics. A recurring revenue business model and a well-diversified tenant base assure steady cash flows.
IRM currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the company’s 2024 FFO per share has been raised 3.5% over the past month to $4.38, which indicates an increase of 6.3% year over year. The stock has risen 17.9% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Gladstone Commercial Corp.: This industrial REIT focuses on the acquisition, ownership and operation of net leased industrial and office properties across the United States. Gladstone Commercial has been witnessing active leasing, aiding solid occupancy, healthy rental collections and ample liquidity to back its acquisitions and growth efforts.
Gladstone Commercial currently sports a Zacks Rank #1. The Zacks Consensus Estimate for GOOD’s 2024 FFO per share has moved 5.3% northward over the past month to $1.38. Also, for 2025, the consensus mark for FFO per share has been raised 10.1% over the past month. The stock has rallied 4% in the past month.
Host Hotels & Resorts: This hotel REIT has a portfolio of luxury and upper-upscale hotels that is well-poised to benefit from its presence in the top U.S. markets with strong demand. Host Hotels is expected to witness a stable operating environment in 2024 due to the continuous improvement in the group business, a gradual recovery in the business transient and steady leisure demand.
Host Hotels currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for HST’s 2024 FFO per share has been raised 1.6% over the past month to $1.92. Moreover, the Zacks Consensus Estimate for 2025 FFO per share has been moved up 3.7% over the past month. The stock has appreciated 8.7% in the past three months.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Host Hotels & Resorts, Inc. (HST) : Free Stock Analysis Report
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