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4 REITs to Consider as Economic Growth Projections Move North

Are you fretting too much about your investments in the REITs because of the Federal Reserve’s recent decision to keep the benchmark interest rate steady at a 22-year high of 5.25-5.50% and indicating for keeping the rates high for a longer period? Then, it’s time to think again and focus on Welltower WELL, AvalonBay Communities AVB, SBA Communications Corporation SBAC and Essential Properties Realty Trust EPRT.

This is because although the Fed has indicated through its dot plots that there will be fewer rate cuts next year, its latest Summary of Economic Projections paints a brighter picture for economic growth and the labor market.

Members have revised economic growth projections north, with the gross domestic product now expected to increase 2.1% this year, more than double June's 1% estimate, indicating that a recession is not expected in the immediate future. Further, the GDP projection for 2024 moved up to 1.5% from 1.1%.

Also, the labor market is likely to exhibit resiliency than what was previously expected, with officials estimating the unemployment rate for the current year to be 3.8%, down from the prior projection of 4.1%. Further, the expected inflation rate, as measured by the core personal consumption expenditure price index, decreased to 3.7%, down by 0.2 percentage points from June.

Now with economic activity “expanding at a solid pace”, as characterized by the committee, REITs stand to gain. This is because with the REIT sector offering the real estate structure for several economic activities, be it real or virtual, there are pockets of strength, even in a high-rate environment. REITs’ business usually buoys up on a stepped-up economy and a resilient job market because a fatter purse gives tenants more power to demand real estate space.

What’s more encouraging is REITs’ characteristic of providing natural protection against inflation. Particularly, both rents and real estate values have a tendency to move north with prices increasing, thereby aiding dividend growth. The majority of leases are tied to inflation, which leads to rent increases as inflation goes up. Therefore, even during the inflationary period, investments in the REIT industry can offer a steady stream of income.

Moreover, REITs are effectively managing challenges posed by stricter credit conditions and the persistent high-interest-rate environment with typical low-leverage policies and focusing on fixed-rate and unsecured debt. Solid balance sheets remain a major reason for investors to stay invested in REITs, even amid the capital and mortgage market’s turmoil in the current real estate investment environment.

Per the data from Nareit’s Total REIT Industry Tracker Series (T-Tracker) for the second quarter of 2023, leverage ratios remained modest with debt-to-market assets below 35%, while the percentage of total debt at a fixed rate was 91%. Moreover, the percentage of the total debt that was unsecured was 79%, offering REITs a competitive edge.

Stock Picks

Welltower partners with top senior housing operators, post-acute care providers and health systems and invests in the real estate infrastructure, encompassing senior housing, post-acute care communities and outpatient medical facilities in key growth markets across the United States, Canada and the UK.

Welltower is well-poised to benefit from its diversified portfolio of healthcare real estate assets. Given the continued strength of its senior housing operating portfolio, aided by favorable demographic trends, healthy demand-supply fundamentals, and robust and accretive capital deployment activity, the company recently amped up its current-year normalized funds from operations (FFO) per share guidance to $3.51-$3.60 from $3.48-$3.59. We expect the metric to exhibit year-over-year growth of 14.9% in 2023. Furthermore, WELL’s portfolio-restructuring efforts and solid balance sheet augur well.

Welltower currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2023 FFO per share has been revised 1.4% north over the past two months to $3.55. It also suggests a 6% increase year over year.

AvalonBay’s premier portfolio of multi-family apartment communities in the high-barrier-to-entry regions of the United States is well-poised to benefit from the healthy demand for residential properties. Its portfolio diversification efforts and focus on expanding into the suburban markets are likely to aid in generating stable rental revenues over time.

We estimate year-over-year growth of 5.3% in total revenues in 2023. This residential REIT is also banking on technology and scale to drive margin expansion. Further, its encouraging development pipeline and solid balance sheet augur well for long-term growth.

Per its recent operating update, AvalonBay reported a 5.3% increase in same-store residential rental revenues for the two months ended Aug 31, 2023 compared with the prior-year period. This is roughly 40 basis points higher than the company’s most recent expectation on Jul 31, 2023. This demonstrates its adaptability in the face of market shifts.

Analysts seem bullish on this Zacks Rank #2 stock. The estimate revision trend for 2023 FFO per share indicates a favorable outlook for the company as it has increased three cents upward over the past month to $10.57. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SBA Communications' global footprint of extensive wireless communication assets is poised to benefit from increased capital spending by wireless carriers to expand their networks amid accelerated 4G and 5G network deployment efforts.

Its long-term leases with its tenants assure stable cash flows. For 2023, we expect a 7.1% year-over-year increase in site-leasing revenues.  Also, the company’s strategic buyouts and portfolio expansion efforts to capitalize on the secular trends of the industry are encouraging.

SBA Communications currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2023 FFO per share has been revised four cents north over the past month to $12.90. It also suggests a 5.4% increase year over year.

Essential Properties owns, acquires and manages mainly single-tenant properties, which are net leased to service-oriented and experience-based businesses on a long-term basis. The company serves casual dining, car washes, automotive services, medical services, convenience stores, equipment rental, entertainment, early childhood education and health and fitness sectors.

With a portfolio comprising 1,742 freestanding net lease properties with a weighted average lease term of 14 years and a weighted average rent coverage ratio of 4.1 as of Jun 30, 2023, EPRT is well-poised to benefit from the solid fundamentals of the retail real estate market. As of Jun 30, 2023, the company’s portfolio was 99.9% leased, and this reflects the solid demand for the company’s properties.

Essential Properties currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2023 FFO per share has been revised 1.2% upward over the past week to $1.66. It also suggests an 8.5% increase year over year.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report

SBA Communications Corporation (SBAC) : Free Stock Analysis Report

Welltower Inc. (WELL) : Free Stock Analysis Report

Essential Properties Realty Trust, Inc. (EPRT) : Free Stock Analysis Report

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