Retail REIT investors can access residential, commercial, and specialty real estate without buying physical properties. REITs also pay solid dividends, which help investors generate a steady income stream irrespective of the economic cycle.
Amid the macroeconomic uncertainty, buying top-rated retail REITs Alexander's, Inc. (ALX) and Saul Centers, Inc. (BFS) could be wise. Additionally, investors could monitor EPR Properties (EPR) for appropriate entry points.
The appeal of REITs primarily lies in their dividends. Apart from dividends, retail REITs help diversify one’s portfolio and benefit from rising consumer spending. In August 2023, the Consumer Price Index (CPI) increased 0.6% sequentially and 3.7% annually. However, despite these inflationary pressures, American consumers displayed robust spending habits, thanks to moderating inflation and a resilient job market.
On the other hand, the U.S. Treasury's 10-year yield rose to its highest level in 16 years after the central bank indicated that interest rates would stay higher for longer. The higher bond yields have made the REIT dividends less tempting for investors. Moreover, the higher rates are also expected to pressure REITs as they need to borrow heavily.
Cresset Capital’s chief investment officer, Jack Ablin, said, “Not only are REIT’s bond substitutes, but they also rely on borrowing, so that just makes them doubly interest-rate-sensitive.” Gina Szymanski, portfolio manager for REITs at AEW Capital Management, believes that the Treasury yields will peak around current levels, which could help REITs.
REITs are known to outperform when the economy weakens. Szymanski said, “When the Fed tries to slow the economy, it’s usually successful. That usually results in declining earnings for companies in general and when that happens, it’s the time for REITs to shine.”
Considering these factors, buying fundamentally strong REITs ALX and BFS could be wise. Meanwhile, investors could watch EPR for opportune entry points.
Stocks to Buy:
Alexander's, Inc. (ALX)
ALX leases, manages, develops, and redevelops properties in the greater New York City metropolitan area.
ALX’s 48.58% trailing-12-month net income margin is 333% higher than the industry average of 11.22%. Likewise, its 37.26% trailing-12-month EBIT margin is 76.4% higher than the industry average of 21.12%. Its 115.31% trailing-12-month FFO Payout Ratio is 84.9% higher than the industry average of 62.35%.
ALX’s annual dividend of $18 yields 9.88% on the current share price. The company’s dividend payouts have increased at a 0.3% CAGR over the past five years. Its four-year average yield is 7.26%. ALX paid a dividend of $4.50 per share on August 18, 2023.
For the fiscal second quarter ended June 30, 2023, ALX’s revenue increased 7.7% year-over-year to $53.67 million. Its net income rose 333% over the prior-year quarter to $64.15 million. The company’s non-GAAP FFO came in at $18.21 million. Also, FFO per share came in at $3.55.
For the quarter ending December 31, 2023, ALX’s revenue is expected to increase 1.2% year-over-year to $53.70 million. Over the past three months, the REIT’s shares have declined 1.4% to close the last trading session at $182.23.
ALX's positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the REITs – Retail industry, it is ranked first out of 29 stocks. It has a B grade for Stability. Click here to see the additional ratings of ALX for Growth, Value, Momentum, Sentiment, and Quality.
Saul Centers, Inc. (BFS)
BFS is a self-managed, self-administered equity REIT headquartered in Bethesda, Maryland, which currently operates and manages a real estate portfolio of 61 properties, which includes (a) 50 community and neighborhood shopping centers and seven mixed-use properties with approximately 9.8 million square feet of leasable area and (b) four non-operating land and development properties.
BFS’ 45.32% trailing-12-month EBIT margin is 114.5% higher than the industry average of 21.12%. Likewise, its 62.94% trailing-12-month EBITDA margin is 15% higher than the industry average of 54.74%.
On the other hand, its 25.66% trailing-12-month AFFO/Total Revenue is 39.6% lower than the industry average of 42.45%. Its 7.41% trailing-12-month AFFO Yield is 7.2% lower than the industry average of 7.98%.
BFS’ annual dividend of $2.36 yields 6.69% on the current share price. The company’s dividend payouts have increased at a 3.6% CAGR over the past three years and a 2.7% CAGR over the past five years. Its four-year average yield is 5.58%. BFS will pay a dividend of $0.59 per share on October 31, 2023.
BFS’ total revenue for the second quarter ended June 30, 2023, increased 5.7% year-over-year to $63.71 million. Its net income available to common stockholders rose 1.4% over the prior-year quarter to $10.36 million. Its per-share net income available to common stockholders remained flat year-over-year at $0.43.
The company’s FFO available to common stockholders and noncontrolling interests declined 0.3% year-over-year to $26.50 million. In addition, its FFO per share available to common stockholders and noncontrolling interests remained flat year-over-year at $0.78.
Over the past three months, the REIT has declined 5.3% to close the last trading session at $35.27.
BFS’ POWR Ratings reflect promising prospects. It has an overall rating of B, which translates to Buy in our proprietary rating system.
Within the REITs – Retail industry, it is ranked #2. It has an A grade for Stability and a B for Sentiment. Click here to see the other ratings of BFS for Growth, Value, Momentum, and Quality.
Stock to Watch:
EPR Properties (EPR)
EPR is a diversified experiential net lease real estate investment trust (REIT) specializing in select enduring experiential properties in the real estate industry. It focuses on real estate venues that enhance out-of-home leisure and recreation experiences, attracting consumers who spend discretionary time and money.
EPR’s 55.02% trailing-12-month EBIT margin is 160.5% higher than the industry average of 21.12%. Likewise, its 52.34% trailing-12-month levered FCF margin is 38.1% higher than the industry average of 37.91%.
On the other hand, its 0.12x trailing-12-month asset turnover ratio is 9.6% lower than the industry average of 0.13x. Its 63.54% forward AFFO Payout Ratio is 14.4% lower than the industry average of 74.19%.
EPR’s annual dividend of $3.30 yields 7.94% on the current share price. The company’s dividend payouts have increased at a 7.7% CAGR over the past three years. Its four-year average yield is 6.47%. EPR will pay a monthly dividend of $0.275 per share on October 16, 2023.
EPR’s total revenue for the second quarter ended June 30, 2023, increased 7.8% year-over-year to $172.91 million. Its adjusted funds from operations (AFFO) increased 7.2% over the prior-year quarter to $100.10 million.
The company’s net income available to common shareholders declined 78.3% year-over-year to $7.56 million. Also, its net income available to common shareholders per diluted common share came in at $0.10, representing a decline of 78.3% year-over-year.
Street expects EPR’s FFO and revenue for the quarter ending September 30, 2023, to increase 19.6% and 1.3% year-over-year to $1.39 and $163.52 million, respectively. Its FFO surpassed the consensus FFO estimates in each of the trailing four quarters. Over the past year, the REIT has gained 18% to close the last trading session at $41.54.
EPR has an overall rating of C, which translates to Neutral in our proprietary rating system.
It is ranked #6 in the same industry. It has a B grade for quality and a C for Growth, Value, Momentum, and Stability. To see the other ratings of EPR for Sentiment and Quality, click here.
What To Do Next?
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ALX shares were trading at $182.59 per share on Monday morning, up $0.36 (+0.20%). Year-to-date, ALX has declined -11.16%, versus a 12.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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