- The real estate market has bounced back from the doldrums of the Covid-19 pandemic.
- UBS has identified four baskets of real estate investment trusts as picks for the post-pandemic world.
- UBS analysts also outlined seven mispriced REITs worth buying as the reopening boom continues.
- See more stories on Insider’s business page.
No matter how you look at it, the real estate market has exploded in the wake of the Covid-19 pandemic.
Record-high housing prices are making frequent national headlines. Hotels are filling up again as the demand for travel skyrockets amid relaxed reopening measures. Even the once-doomed strip malls are making a comeback as new suburbanites flock to shopping centers for everything from groceries to furniture.
The ample real estate opportunities in the post-pandemic world are not lost on UBS, which recently initiated coverage of four subsectors of real estate investment trusts that include strip center, malls, self storage, and manufactured housing.
To better understand how thesesubsectors have evolved over the past 14 months, UBS analysts led by Michael Goldsmith utilized UBS’ “changing paradigm of REITs” or the UBS CPR model to identify four baskets of REITs that fit into the categories of pandemic beneficiaries, stable performers, expected recovery, and structural evolution.
The analysts arrived at the four categories by charting the changes in the consensus 2021 forecasts for their funds from operations, as well as the change in the implied 2021 FFO multiples since the start of 2020. (The FFO of REITs, which is similar to the earnings of regular businesses, is used to measure their operating performance.)
Picking stocks from 4 baskets of REITs
The characteristics of these four categories of REITs and the catalysts for their outperformance are summarized by UBS analysts as below.
Beneficiaries, which includes self storage, industrial, towers and data centers REITs, have seen steady to positive revisions to 2021 FFO forecasts and 25%+ growth in 2021 FFO multiples. Although the valuations of this type of REITs have been pushed up, UBS says that investors can buy “the beneficiaries that have more room to run through FFO upside given the degree that valuations have moved so much higher.”
Stable performers refer to the REITs that have seen modestly positive revisions to 2021 FFO forecasts, combined with stable 2021 FFO valuations. This category includes manufactured housing and triple net lease REITs, which justify their premium valuations with steady results through the pandemic. UBS recommends buying “stable performers with strong FFO growth that can translate to share upside.”
The expected recovery group consists of strip centers and multifamily REITs that have seen greater than a -15% decrease to 2021 FFO forecasts, but experienced more than 30%+ increases in 2021 FFO valuations, which suggests that the earnings decline is temporary. Still, their high valuations need to be justified through rising FFO over time. As such, UBS recommends buying “idiosyncratic opportunities where the recovery is more certain than priced in.”
The structural evolution basket includes the subsectors that have experienced more than -20% reductions in 2021 FFO estimates, but haven’t seen an equally offsetting increase in 2021 multiples. This group, which includes offices and malls, need to demonstrate an actual recovery in order to reinvigorate investor interest, UBS said.
7 mispriced real estate stocks to own
UBS said analyzing REITs through the lens of these four baskets has helped them identify mispriced stocks.
For example, because of the rise in valuations of the REITs in the beneficiaries group, the analysts look for FFO upside to consensus, such as Extra Space (EXR).
Meanwhile, stable performers including Sun Communities (SUI) and Equity LifeStyle Properties (ELS) not only justified their premium valuations with steadiness through the pandemic and but also have sustained their strong FFO growth ever since.
On the other hand, while the elevated valuations of REITs in the expected recovery group need to be justified with greater FFO recovery, UBS analysts view Kimco Realty (KIM) as one of the high-quality REITs to play this theme.
The entire list of the seven real estate stocks, along with their tickers, market caps, and detailed commentaries (for the four REITs with “buy” ratings), are listed below.