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Real estate fundamentals look positive and stock valuations are compelling, but the sector scores low in Seeking Alpha’s Quant Ratings system ahead of the Q3 earnings season as a higher-for-longer interest rates scenario hit sentiments.
“This has been a rough ytd [Overweight] call for us. But we continue to like the optionality the sector provides should rising rate fears abate. Fundamentals remain generally solid per earnings and margin trends,” Citi stated in a recent investor note.
Defensive/bond proxy and cyclical value sectors like Energy, Materials, Utilities and Real Estate have been the weakest performers during both falling and range-bound inflation regimes, Ned Davis Research said in a separate note.
Real Estate, which holds a 2.5% weightage on S&P, was one of the worst-performing among all the S&P 500 sectors. The S&P 500 real estate sector, which is expected to report negative EPS growth of 31.53%, declined by 9.6% in Q3, compared to the S&P 500 index that posted a loss of 3.65%.
Notable real estate movers were Fangdd Network Group (DUO), Wheeler Real Estate Investment Trust (WHLR), Gaucho Group Holdings (VINO), Hersha Hospitality Trust (HT) and FLJ Group (FLJ).
Quant Ratings awards Real Estate one of the lowest health scores among the various sectors. The rating system, which considers factors such as valuation, earnings growth and recent stock performance, gives the sector a Sell rating with a score of 1.62.
Out of a total of 174 real estate stocks graded by the ratings system, 12 are rated Strong Buys, 11 are Buys, 113 are assigned Hold, 19 are Sells and 18 are Strong Sells.
Innovative Industrial Properties (IIPR), The RMR Group (RMR) and EPR Properties (EPR) are the top picks in the sector.
IIPR’s Strong Buy rating considers its AFFO growth that stands at 9.69%, while the sector median is 4.32%. The industrial REIT reports a dividend growth rate of 5.88%, and the sector median is 3.76%.
RMR’s profitability and dividend safety has been graded an A+ by the ratings system. Meanwhile, EPR’s 4.87 Quant score considers the specialized REIT’s low valuation and favorable estimate revisions.
Altisource Portfolio Solutions (ASPS) and Doma Holdings (DOMA) were ranked the least among real estate stocks, with Quant scores of 1.00 and 1.02, respectively.
ASPS is said to have inferior profitability and declining growth when compared to other real estate stocks, while DOMA is at a high risk of performing badly.
For Real Estate, the benefit of paying a dividend versus non-payers is highest, and companies that fall within the dividend-paying cohort tend to be more stable.
Office Properties Income Trust (OPI), Global Net Lease (GNL) and Medical Properties Trust (MPW) are the stocks with the highest dividend yields.