K&C REIT plc (AIM:KCR) is a GBP£3.96M real estate investment trust (REIT), which is a collective vehicle for investing in real estate that began in the US and has since been adopted worldwide as an investment asset. Real estate analysts are forecasting for the entire industry, negative growth in the upcoming year, and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the UK stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether KCR is lagging or leading in the industry. Check out our latest analysis for K&C REIT
What’s the catalyst for KCR’s sector growth?
Concerns surrounding rate increases and treasury yield movements have made investors dubious around investing in REIT stocks. This is because REITs tend to be dependent on debt funding. They are also considered as bond investment alternatives due to their high and stable dividend payments. In the past year, the industry delivered negative growth of -22.87%, underperforming the UK market growth of 1.54%. KCR lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its REIT peers. As the company trails the rest of the industry in terms of growth, KCR may also be a cheaper stock relative to its peers.
Is KCR and the sector relatively cheap?
REIT companies are typically trading at a PE of 14x, relatively similar to the rest of the UK stock market PE of 18x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 7.31% compared to the market’s 12.78%, potentially indicative of past headwinds. Since KCR’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge KCR’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? KCR has been a REIT industry laggard in the past year. If your initial investment thesis is around the growth prospects of KCR, there are other REIT companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how KCR fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If KCR has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its REIT peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at KCR’s future cash flows in order to assess whether the stock is trading at a reasonable price.