Chicago, IL – February 21, 2025 – Today, Zacks Equity Research discusses Essential Properties Realty Trust, Inc. EPRT and Urban Edge Properties UE.
Industry: Retail REIT
Link: https://www.zacks.com/commentary/2418622/2-retail-reits-poised-to-gain-despite-industry-challenges
The Zacks REIT and Equity Trust - Retail industry constituents are expected to face a challenging environment because of the growth in e-commerce. Moreover, fiscal policy, trade policy and changing consumer spending patterns present risks to the retail real estate market. Also, the inflationary impact of such policies may prompt the Federal Reserve to keep interest rates high, negatively affecting interest-sensitive retail REITs.
However, the resilient consumer environment and limited new construction support stable demand, with high-quality locations continuing to outperform. Additionally, experiential retail, designed to boost foot traffic and engagement, is expected to play a significant role in revitalizing retail real estate. Amid this, Essential Properties Realty Trust, Inc. and Urban Edge Properties are expected to continue to benefit.
The Zacks REIT and Equity Trust - Retail industry comprises REITs that own, develop, manage and lease various retail properties, including regional malls, outlet centers, grocery-anchored shopping venues and power centers with big-box retailers. Net lease REITs focus on freestanding properties, where tenants bear rent and most operating expenses.
Retail REIT performance is significantly impacted by economic conditions, employment levels and consumer spending trends. Key drivers of demand include the geographic location of properties and the demographics of surrounding trade areas. While the industry faced significant challenges from declining foot traffic, store closures and retailer bankruptcies in the past, it is now experiencing a rebound driven by renewed consumer interest in in-store shopping, signaling a positive shift in the retail landscape.
Macroeconomic Uncertainty and Tariff Impacts: Macroeconomic uncertainty, along with the potential effects of fiscal policies such as tariffs, presents risks to the retail real estate market. While retail demand remains healthy, any fluctuations in consumer spending due to economic volatility could significantly affect the sector.
Tariffs, in particular, place additional pressure on retailers dependent on low-cost imports, increasing financial strain and heightening the likelihood of store closures, rising vacancies and reduced cash flow for retail REITs. Factors like higher budget deficits and potential shifts in trade policies could worsen inflation, restraining consumer spending.
The inflationary impact of tariffs and other policies may prompt the Federal Reserve to keep interest rates high, negatively affecting interest-sensitive retail REITs. These REITs, which are heavily reliant on debt, are particularly vulnerable to investor concerns during periods of high borrowing costs.
E-commerce Growth Affects Foot Traffic: The rise of e-commerce continues to pose challenges for brick-and-mortar retailers and their landlords, even with the implementation of omnichannel strategies. The ease of online shopping is leading some retailers to avoid expanding physical stores, decreasing the demand for retail space.
As online sales continue to grow, many traditional retailers are responding by downsizing their store footprints or consolidating locations. This shift is especially noticeable in sectors like apparel and electronics, where the demand for large retail spaces is getting affected. Additionally, the growth of online shopping has increased the appeal of open-air shopping centers — such as neighborhood, community, and strip malls — over traditional enclosed malls, as retailers prioritize making it easier for customers to pick up and return online orders.
Balanced Market Dynamics and Experiential Retail: Retail REITs are poised to continue benefiting from a strong consumer market, limited new construction and a stable tenant mix, with demand driven by traditional retail, consumer services and cross-border entrants. Prime locations continue to outperform due to the ongoing "flight to quality" trend.
Additionally, experiential retail, designed to boost foot traffic and engagement, is expected to play a significant role in revitalizing retail real estate. There is an increasing focus on enhancing the customer experience by incorporating entertainment, dining and interactive features in retail properties. This approach not only attracts and retains customers but also transforms shopping into an immersive experience.
By offering more value through unique interactions, physical stores are maximizing their space usage, catering to the modern consumer’s desire for experiences. This strategy encourages longer visits, boosts sales and drives up demand for well-located retail properties. Also, mixed-use developments, blending retail, residential and entertainment, are becoming pivotal in revitalizing urban spaces and driving vibrancy.
The Zacks REIT and Equity Trust - Retail industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #151, which places it in the bottom 39% of around 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 top 50% of the Zacks-ranked industries is a result of the upward 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 estimates for 2025 and 2026 have moved 5.7% and 7.8% south.
However, 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.
The REIT and Equity Trust - Retail Industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has advanced 6.6% during this period compared with the S&P 500’s rise of 24.1% and the broader Finance sector’s growth of 25.5%.
On the basis of forward 12-month price-to-FFO, which is a commonly used multiple for valuing retail REITs, we see that the industry is currently trading at 16.37X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 22.71X. The industry is also trading below the Finance sector’s forward 12-month P/E of 17.38X.
Over the last five years, the industry has traded as high as 18.90X and as low as 10.45X, with a median of 15.14X.
Essential Properties: This Princeton, NJ-headquartered REIT is engaged in the ownership, acquisition and management of mainly single-tenant properties, which are net leased to service-oriented and experience-based businesses on a long-term basis.
The company serves car washes, early childhood education, medical/dental, quick-service restaurants, automotive service, entertainment, casual dining, equipment rental and sales sectors. This focus on service-oriented and experience-based tenants helps generate stable rental cash flows as such businesses are less susceptible to competition from Internet retailing. With a weighted average lease term of 14 years and an average unit-level rent coverage ratio of 3.5 as of Dec. 31, 2024, EPRT is well-poised to ride the growth curve.
Essential Properties currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2025 FFO per share has been marginally revised upward over the past week to $1.89. This also suggests an 8.6% increase year over year. The consensus mark for 2026 FFO per share of $2.04 also indicates 7.7% projected growth year over year. The stock has risen 2.3% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Urban Edge Properties: This New York-based company is engaged in the owning, managing, acquiring, developing and redeveloping retail real estate in urban communities, primarily in the Washington, DC to Boston corridor. Its properties are concentrated in the most densely populated, supply-constrained region in the country, assuring a steady flow of traffic.
Also, a large portion of Urban Edge’s portfolio is anchored by high-performing essential retailers, which ensures stable cash flows. Particularly, 75% of portfolio value is grocery-anchored. It has a healthy balance sheet, with only 12% of debt maturing through 2026.
UE currently has a Zacks Rank #2. The Zacks Consensus Estimate for its 2025 FFO per share has been raised 1.4% upward over the past two months to $1.40, indicating a 3.7% year-over-year increase. Moreover, the consensus estimate for 2026 FFO per share has moved marginally northward over the past two months. Though the stock has declined 11.8% in the past three months, it currently offers a good entry point.
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.
Since 2000, our top stock-picking strategies have blown away the S&P's +7.7% average gain per year. Amazingly, they soared with average gains of +48.4%, +50.2% and +56.7% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Urban Edge Properties (UE) : Free Stock Analysis Report
Essential Properties Realty Trust, Inc. (EPRT) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
