Amid fears that interest rates have further to rise this year, the rate-sensitive real estate sector slumped in February, and the group is facing additional headwinds through the first half of March.
It’s not all bad news, however. For example, real estate investment trusts (REITs) remain desirable assets for income-seeking investors, and there’s value to be had in the sector. Among the related exchange traded funds, the ALPS Active REIT ETF (REIT) provides exposure to both themes.
In fact, some of the actively managed ETF’s marquee holdings are, in the eyes of some analysts, undervalued today. Take the case of Simon Property Group (NYSE: SPG). Simon Property, which accounts for 7.07% of the REIT roster and is the ETF’s second-largest holding, is one of the biggest retail real estate landlords in the U.S.
“It trades at a little under a 20% discount to our fair value, and that one pays a 5.8% dividend yield. And really when I look at both of these REITs, they do operate Class A malls, and in our view, Class A malls, we think have the best locations, the best retail portfolios,” noted Morningstar’s Dave Sekera. “They’re also going to be in the best position to recapture foot traffic as shoppers return. In addition, those Class A mall operators, they’ve been in the best position to continue to redevelop their properties to become more experiential and rely less on just on retail sales.”
An expected rebound in business travel this year coupled with already-vibrant leisure travel data could be supportive of hotel REITs, including Host Hotels & Resorts (HST) and Park Hotels & Resorts (PK). Those two stocks combine for 3.77% of the REIT roster.
“We do see it uptick in conventions. Those have been cut and really reduced for the past three years. Those are starting to trade back up. And so I think we’re starting to see the pickup in those two areas. Those are the areas that we’re looking for, for stocks that we think will benefit as that travel area continues to keep getting more and more active,” added Sekera.
On a related note, VICI Properties (NYSE: VICI) — REIT’s sixth-largest component at a weight of 5.01% — could be a contributor to potential 2023 upside for the ETF.
“We believe it continues to gain acceptance as US Gaming post-pandemic results have highlighted strong top-line demand and improved profit margins and cash flow, the most important items for VICI. While dynamic, we expect peak to trough revenues to fare better vs. what the street is expecting for both the US regional market and Las Vegas,” wrote Macquarie analyst Chad Beynon in a report out in late February.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.