Which of These 3 Retail REITs Should You Buy, Sell, or Hold?

The FTSE Nareit All Equity REITs Index increased by 2.0%, and the FTSE EPRA Nareit Global Extended Index increased by 3.4% in July. This was the first time REITs experienced two consecutive months of gains since October–November 2022.

Given the solid growth trajectory, while investors could consider buying quality retail REITs Saul Centers, Inc. (BFS) and Alexander’s, Inc. (ALX), I think Realty Income Corporation (O) might be best kept on hold for the reasons discussed.

The U.S. Federal Reserve is projected to increase rates by 25 basis points in September, and market expectations imply potential rate cuts starting in 2024, according to CME Group’s FedWatch tool. Moreover, Economist Jim O’Neill predicts that major economies’ central banks will need to maintain interest rates around 5% for a more extended period than anticipated, despite decreasing inflation.

Amid stock market uncertainties, Real Estate Investment Trusts (REITs) stands out as a promising choice. Their unique ability to generate stable and increasing rental incomes positions them favorably against other asset classes. Moreover, REITs offer diversification to counter market fluctuations and an inflation hedge through real estate appreciation.

In addition, rapid urbanization and heightened occupancy rates in cities are boosting the retail REITs market. Moreover, the global demand for warehousing and storage facilities is rising across various industries, such as electronics, automotive, chemicals, food and beverage, pharmaceuticals, and FMCG products.

The global REIT market is anticipated to expand at a CAGR of 2.8% to $333.01 billion by 2027, with North America contributing 63% to the global market growth, as per Technavio.

Stocks to Buy:

Saul Centers, Inc. (BFS)

BFS is a self-administered equity REIT that operates and manages a real estate portfolio of 61 properties. This includes 50 community and neighborhood shopping centers and seven mixed-use properties totaling approximately 9.80 million square feet of leasable area, along with four land and development properties.

BFS’ trailing-12-month EBIT and EBITDA margins of 45.32% and 62.94% are 114.5% and 14.6% higher than the 21.12% and 54.91% industry averages.

BFS pays a $2.36 per share dividend annually, translating to a 6.25% yield on the current price level. Its four-year average dividend yield is 5.50%.

In the fiscal second quarter that ended June 30, 2023, BFS’ total revenue increased 5.7% year-over-year to $63.71 million. Its net income grew 1.1% year-over-year to $17.19 million and its per share net income available to common stockholders remained flat at $0.43.

Moreover, the company’s FFO per share available to common stockholders and noncontrolling interests stood at $0.78.

BFS’ revenue and FFO per share are expected to rise 4.3% and 3.4% year-over-year to $63.69 million and $0.76 in the current quarter ending September 2023.

The stock gained 14.2% over the past three months to close the last trading session at $37.75.

BFS’ solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

BFS has an A grade for Stability and a B for Sentiment. It is ranked second in the 30-stock REITs – Retail industry.

Beyond the POWR Ratings stated above, we have also rated BFS for Growth, Value, Momentum, and Quality. Access all BFS ratings here.

Alexander’s, Inc. (ALX)

ALX leases, manages, develops, and redevelops properties in the greater New York City metropolitan area.

ALX’s trailing-12-month EBIT margin of 37.26% is 76.4% higher than the industry average of 21.12%. Its trailing-12-month cash per share of $104.03 is significantly higher than the $0.60 industry average.

On July 26, 2023, ALX declared a regular quarterly dividend of $4.50 per share, payable on August 18, 2023.

The company pays an annual dividend of $18 translates to a yield of 9.25% on the prevailing price level, higher than its four-year average dividend yield of 7.10%. ALX has raised its dividend payouts at a CAGR of 10.1% over the past three years.

During the fiscal second quarter that ended June 30, 2023, ALX’s revenue increased 7.7% year-over-year to $53.67 million. Its net income and net income per share rose 333% and 332.9% from the previous-year quarter to $64.15 million and $12.51. The company’s non-GAAP FFO came in at $18.21 million or $3.55 per share.

Analysts expect ALX’s revenue to amount to $53.70 million for the fiscal third quarter ending September 2023. The company’s FFO per share for the current quarter is expected to be $3.27.

Shares of ALX have gained 12.7% over the past three months to close the last trading session at $195.36.

ALX’s robust outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.

The stock has a B grade for Growth and Stability. It has ranked first in the same industry.

Click here to access additional ALX ratings (Value, Momentum, Quality, and Sentiment).

Stock to Hold:

Realty Income Corporation (O)

O is a REIT that acquires and manages single-unit freestanding commercial properties. It engages in long-term net lease agreements with commercial clients.

O’s trailing-12-month EBIT margin of 40.11% is 89.9% higher than the 21.12% industry average. However, its trailing-12-month asset turnover ratio of 0.07x is 42.8% lower than the industry average of 0.13x.

O pays a $3.06 per share dividend annually, translating to a 5.17% yield on the current price level. Its dividend payments have grown at a 4.1% CAGR over the past three years. The company’s four-year average dividend yield is 4.29%. Moreover, it has a record for raising its dividends for 26 consecutive years.

During the second quarter that ended June 30, 2023, O’s revenue increased 25.8% year-over-year to $1.02 billion. Its AFFO available to common stockholders and AFFO per share grew 15.1% from the previous-year quarter to $671.70 million and $1.00.

However, the company’s net income available to common stockholders and net income per share decreased 12.5% and 21.6% from the year-ago quarter to $195.40 million and $0.29.

Street expects O’s FFO per share to rise 7% from the prior year’s quarter to $1.04 in the fiscal quarter ending September 2023.

While O gained marginally intraday, it has declined 18.8% over the past year to close the last trading session at $59.51.

O’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to a Neutral in our proprietary rating system.

O has a C grade for Growth, Momentum Sentiment, Stability, and Quality. It is ranked #23 out of 30 stocks in the same industry.

To access O’s additional POWR Ratings (Value), click here.

43 Year Investment Pro Shares Top Picks

Steve Reitmeister is best known for his timely market outlooks & unique trading plans to stay on the right side of the market action. Click below to get his latest insights…

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BFS shares were trading at $38.00 per share on Thursday morning, up $0.25 (+0.66%). Year-to-date, BFS has declined -2.34%, versus a 18.44% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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