Chicago, IL – December 18, 2024 – Today, Zacks Equity Research discusses Welltower Inc. WELL, American Healthcare REIT, Inc. AHR and Highwoods Properties, Inc. HIW.
Link: https://www.zacks.com/commentary/2384640/3-equity-reit-stocks-to-bet-on-amid-healthy-industry-fundamentals
The REIT and Equity Trust - Other industry benefits from strong demand across asset classes, supported by a resilient economy, technological advancements and demographic shifts. Data center and healthcare REITs are thriving, while office spaces see optimism due to increased leasing activity and demand for premium properties.
Industrial and logistics sectors remain strong, fueled by e-commerce growth. Interest rate cuts further boost REITs’ attractiveness by lowering borrowing costs. Amid these, players like Welltower Inc., American Healthcare REIT, Inc. and Highwoods Properties, Inc. are poised well for growth.
However, global risks, including geopolitical tensions and China’s slowdown, could dampen investors’ confidence. Shifting tenant preferences are creating market disparities, with non-prime properties struggling.
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. It is imperative to thoroughly explore the fundamentals of these asset categories before making any investment decisions.
The exponential growth of digital services, cloud computing, artificial intelligence (AI) and 5G is fueling a sustained rise in demand for data center REITs, with ever-growing applications across smartphones, smart devices, laptops and desktops intensifying the need for processing, storage and computation. In the office sector, steady economic growth and increasing office attendance are boosting confidence in future leasing activity.
Employers are prioritizing collaborative, amenity-rich workspaces to attract and retain top talent, signaling continued growth for premium office properties. Meanwhile, aging populations and rising healthcare needs are expected to drive demand for healthcare real estate. Moreover, despite some recent moderation, the industrial and logistics sector remains well-positioned, supported by resilient consumer spending and ongoing e-commerce growth, ensuring a relatively healthy demand for warehouse and distribution spaces.
Interest Rate Cut Expectations Boost Attractiveness: The recent rate cuts and indications of a further rate cut in the December FOMC meeting are likely to raise the attractiveness of the REITs. Any rate cut, even a slight one, is good news for the rate-sensitive REIT industry because REITs’ dependence on debt for business keeps investors optimistic about their performances in a rate-cut environment as the companies benefit from lower borrowing costs. Low interest rates contribute to higher valuations. Also, their dividend yield grabs investors’ attention in times like these.
Geopolitical Challenges and Shifting Tenant Preferences Continue to Raise Concerns: Challenges that could hinder the REIT industry's momentum loom. Ongoing global risks, such as China's economic slowdown and geopolitical tensions, may dampen investor confidence and cross-border capital flows. In this climate, customers are prioritizing cost control and postponing leasing decisions, reducing urgency in committing to new deals while awaiting further price adjustments.
Moreover, shifting tenant preferences, particularly in office and industrial spaces, are creating market disparities, leaving non-prime properties struggling to compete. For hotel REITs, despite consumer spending on experiences, we expect hotel demand to weaken further as cooling spending is impacted by declining savings.
The Zacks REIT and Equity Trust - Other industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #81, which places it in the top 32% 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 robust 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 northward 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 gaining confidence in this group’s growth potential of late.
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 the S&P 500 composite and the broader Zacks Finance sector in a year.
The industry has risen 1.4% during this period compared with the S&P 500’s increase of 28.6% and the broader Finance sector’s 22.2% 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 15.68X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 22.66X. The industry is trading below the Finance sector’s forward 12-month P/E of 17.40X.
Over the last five years, the industry has traded as high as 22.22X and as low as 12.76X, with a median of 16.98X.
American Healthcare REIT: Headquartered in Irvine, CA, this REIT is engaged in the acquisition, ownership and operation of a varied portfolio of clinical healthcare real estate, with a focus on senior housing, skilled nursing facilities, outpatient medical buildings and other healthcare-related properties. Its portfolio spans the United States, the United Kingdom and the Isle of Man.
American Healthcare REIT continues to demonstrate strong growth, with notable performance across its diversified healthcare portfolio. Its same-store net operating income growth of 17% in the third quarter of 2024 reflects solid results, especially in senior housing and integrated health campuses.
The company is expanding through strategic acquisitions, including gaining full ownership of Trilogy Holdings. With a strengthened financial position and robust portfolio, American Healthcare REIT is well-positioned for future growth in the healthcare real estate sector.
American Healthcare REIT currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for AHR’s 2024 FFO per share has been raised three cents over the past month to $1.37. Moreover, the Zacks Consensus Estimate for 2025 FFO per share has also moved up eight cents over the same period. The stock has appreciated 14.8% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Welltower Inc.: A Toledo-based REIT and S&P 500 company, Welltower partners with top senior housing operators, post-acute providers and health systems to fund real estate for innovative care models, enhancing wellness and healthcare experiences. Welltower’s portfolio includes properties in high-growth U.S., Canadian and UK markets, focusing on seniors housing, post-acute communities and outpatient medical facilities.
Given an aging population and an expected rise in senior citizens’ healthcare expenditure, Welltower’s senior housing operating portfolio is well-positioned to capitalize on this positive trend. The outpatient medical segment is expected to benefit from the favorable outpatient visit trends in the near term. The company’s strategic restructuring initiatives have enabled it to attract operators and improve its cash flows. Welltower enjoys solid balance sheet strength, and its capital-recycling efforts are encouraging.
WELL currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the company’s 2024 revenues calls for a 18% increase year over year. The consensus mark for 2024 and 2025 FFO per share has also been raised over the past week to $4.27 and $4.75, respectively. The stock has risen 23.8% in the past six months.
Highwoods Properties, Inc.: Headquartered in Raleigh, NC, this office REIT owns, develops, acquires, leases and manages properties in the best business districts (BBDs) of Atlanta, GA; Charlotte, NC; Dallas, TX; Nashville, TN; Orlando, FL; Raleigh, NC; Richmond, VA, and Tampa, FL.
Known for its focus on creating collaborative work environments, Highwoods is well-positioned to benefit from tenants' increasing demand for premium office spaces with class-apart amenities. Despite near-term challenges in office demand, the company's strong portfolio in high-growth Sun Belt markets, coupled with favorable demographic trends and an aggressive capital-recycling program, positions it for long-term rent growth and continued success.
HIW currently carries a Zacks Rank #2. Over the past month, the Zacks Consensus Estimate for the current year and 2025 FFO per share has witnessed upward revisions to $3.62 and $3.52, respectively. The stock has also risen 19.6% in the past six 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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