Investors are bombarded daily with economic statistics, questions and speculation as to where the U.S. economy is heading. Will there be a recession, and if so, will it be a hard or soft landing? Will inflation creep back into the mix? Will the Federal Reserve cut interest rates in 2024 and if so, how many times? Will the stock market soar or take a dive? The information overload can be overwhelming. Who can blame investors for feeling confused?
Real estate investment trusts (REITs) represent a broad array of U.S. economic life. REITs contain sub sectors of hotels, retail establishments, offices, housing, healthcare and more that provide snapshots of the many different facets of the financial system.
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Fourth-quarter earnings reports for REITs are beginning to be released this week. Within the next two weeks, dozens of REITs will announce earnings as well. Take a look at three REITs, each representing different aspects of the American economy, with upcoming earnings reports. The operating results of these REITs could supply a clue into the present health and future of the U.S. economy.
Boston Properties Inc. BXP is a Boston-based office REIT with 53.5 million square feet across 190 properties concentrated in five large cities- Boston, Manhattan, Washington, D.C., San Francisco and Seattle. The firm calls itself "the largest publicly traded developer, owner and manager of premier workplaces in the United States." Boston Properties has been a member of the S&P 500 since 2006.
As of the end of the third quarter, Boston Properties had a 90.4% occupancy rate with a weighted average lease term (WALT) of 7.5 years. That compares quite favorably with several other office REITs. About 10% of its office properties are in life sciences, which means little risk of employees working from home. Its top 20 tenants include many investment-grade companies.
Analysts have been positive on Boston Properties this past month. On Dec. 20, Piper Sandler analyst Alexander Goldfarb maintained a Neutral rating on Boston Properties but raised the price target from $60 to $77. On Jan. 2, Jefferies analyst Peter Abramowitz upgraded Boston Properties from Hold to Buy and raised the target price from $57 to $80.
Office REITs such as Boston Properties have performed remarkably well over the last several months, despite all the warnings about empty offices and the decline of commercial property values. Boston Properties' total return since Nov. 1 is 33.59%. But investors will be eyeing this REIT's fourth-quarter earnings carefully to see whether vacancies or unpaid rent levels are rising. A significant rise in either could portend a difficult recession ahead.
Boston Properties will report its fourth-quarter earnings after the closing bell on Jan. 30.
AvalonBay Communities Inc. AVB is a residential REIT that acquires, develops and manages multifamily communities. As of the third quarter of 2023, AvalonBay Communities owned approximately 89,240 apartments directly or indirectly in 296 communities across 12 states and Washington, D.C.
Analysts have been tough on Avalon Bay this month. On Jan. 5, Keybanc analyst Austin Wurschmidt downgraded AvalonBay from Overweight to Sector Weight. On Jan. 2, Wolfe Research analyst Andrew Rosivach downgraded AvalonBay from Outperform to Peer Perform.
The strength of earnings in the residential REIT sector often contrasts with weakness in the real estate market. If people aren't buying homes, they will choose to rent instead, and that spurs demand. By contrast, a slight weakness in rental occupancies could signal a pickup in home sales. But a more pronounced weakness in occupancies or rents could also signal the advent of recession as tenants terminate leases to return to living with family or moving in with friends.
AvalonBay's total return over the past year is 9.09%. Fourth-quarter earnings will be reported after the closing bell on Jan. 31.
NNN REIT Inc. NNN, formerly known as National Retail Properties, is an Orlando, Florida-based triple net-lease REIT that owns a diversified group of stand-alone retail outlets across the U.S. It has 3,511 properties totaling 35.8 million square feet in 49 states. NNN REIT has approximately 400 tenants, including 7-Eleven, Sunoco, Best Buy, Wendy's, Camping World, BJ's Wholesale Club, Taco Bell and Chuck E. Cheese.
NNN is an income REIT stalwart and Dividend Aristocrat that has increased its annual dividend for 34 consecutive years, during which time it hasn't cut or suspended its dividend. Its total return since January 2000 is 668.52%, or an average annual total return of 8.86%. However, like several other triple-net REITs, the past year has been difficult, with a total return of negative 7.04%.
NNN REIT has maintained its 99.2% occupancy level for several quarters and presently has a weighted average remaining lease term (WALT) of over 10 years.
One caveat about NNN REIT is that about 5% of its tenant base is made up of AMC Entertainment Holdings Inc. AMC and Walgreens Boots Alliance Inc. WBA, two entities that have been struggling. AMC recently raised $325 million to stave off bankruptcy by issuing 40 million shares of common stock. But its share price has now been decimated from $62 in August to a recent close of $4.33.
Shares of Walgreens are down by about 33% since it announced last June that it will close 150 stores in the U.S. by the end of August 2024.
LA Fitness and Life Time Fitness comprise another 4.6% of NNN's tenant base. Any difficulties in securing rents or declines in occupancy from these tenants could signal a hard landing recession is coming. Gym memberships are one of the things that people cut back on during recessions.
On the other hand, a strong fourth-quarter report would show that consumers are still spending, and retailers are continuing to do well. That would indicate the threat of recession is still slight for 2024.
NNN REIT will report fourth-quarter earnings before the opening bell on Feb. 8.
Weekly REIT Report: REITs are one of the most misunderstood investment options, making it difficult for investors to spot incredible opportunities until it's too late. Benzinga's in-house real estate research team has been working hard to identify the greatest opportunities in today's market, which you can gain access to for free by signing up for the Weekly REIT Report.
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