Billionaire Seth Klarman Says the Real Estate Sector Could Be the Next Big Investment Opportunity — Here Are 2 REIT Stocks That Analysts Like
The stock market narrative is often defined by themes. Last year, energy stocks ruled the roost, driven by Russia’s invasion of Ukraine and the subsequent global energy crisis. In 2023, so far, tech stocks have been driving the gains while riding the AI trend. But according to billionaire Seth Klarman, the next big opportunity could lie in a bit of a surprising area.
Considering the low occupancy rates in the post-Covid world and the persistent work-from-home trend, you might think the commercial real estate sector is one to avoid, but that is exactly why it appeals to Klarman.
“We think real estate is an area that is full of so many fundamental challenges, but the fundamental challenges have caused urgent selling. You can see a pullback in lending, you can see vacancies in office, troubles in retail for years and years. And so that doesn’t automatically make it interesting. But it may mean that as other people abandon it… there may be opportunities to buy,” Klarman recently said. “You can find opportunities around the edges of what other people are doing, finding situations that other people are throwing out like the baby with the bathwater. And they exist.”
Klarman, who has a net worth of around $1.5 billion and whose Baupost Group oversees about $25 billion in assets has a record that speaks for itself, so it might be worth looking into the real estate sector for those opportunities.
With this in mind, we pulled out of the TipRanks database two REIT (real estate investment trust) stocks that are getting the thumbs up right now from the Street’s stock experts – both are rated as Strong Buys by the analyst consensus. Let’s check out if they could represent the next big investing opportunity.
Agree Realty (ADC)
The first name we’ll look at is Agree Realty, a prominent real estate investment trust (REIT) that specializes in the acquisition and development of properties for commercial use. Founded in 1971, the Bloomfield Hills, Michigan-based firm has established itself as a leader in the retail industry by focusing on single-tenant net lease properties. The company primarily targets leases to nationally recognized retailers and counts some huge names as tenants, including Walmart, Best Buy, Dollar Tree and TJX, amongst others. As of the end of March, the company’s portfolio boasted 1,908 properties, located across 48 states.
Agree Realty has shown consistent revenue growth over the years, and that was the case again in the most recently reported quarter, for 1Q23. Revenue rose by 28.8% year-over-year to $126.62 million, whilst also beating consensus expectations by $2.13 million. Q1 AFFO (adjusted funds from operations) of $0.98 also just edged ahead of the analysts’ prediction, by $0.01. Looking ahead, the company raised its forecast for acquisition volume for 2023, from at least $1.0 billion beforehand to at least $1.2 billion.
REITs are known for their juicy dividends and ADC’s has grown steadily over the years. Since 2021, the company has been paying the dividend on a monthly basis. The current payout stands at $0.24 and yields 4.34%, enough to beat the current rate of inflation.
For BNP Paribas analyst Nate Crossett, this is a stock that ticks all the right boxes. He writes, “ADC is a midcap cap net lease REIT with a current portfolio that is highly diversified and includes a significant amount of investment grade tenants… With a large total addressable market in the US, we see ample opportunities for Agree Realty to grow its portfolio over time… Given the company’s size, the quality of the in-place portfolio, and its embedded growth, we believe there is potential valuation support for the shares. In other words, if shares were to ever trade at a substantial discount to peers, we believe larger buyers could emerge to capitalize on the dislocation.”
To this end, Crossett rates ADC shares an Outperform (i.e., Buy) while his $80 price target implies one-year share appreciation of 22%. (To watch Crossett’s track record, click here)
Overall, it’s clear that Wall Street agrees with Crossett on the forward prospects for ADC. The stock’s 8 recent analyst reviews include 7 Buys and 1 Hold, for a Strong Buy consensus indicative of a bullish outlook. The shares are priced at $65.47 and their $75.43 average price target implies a 12-month upside of 15%. (See ADC stock forecast)
NETSTREIT (NTST)
Let’s stay in the same ballpark for our next REIT. NETSTREIT specializes in acquiring, owning, and managing single-tenant, necessity-based retail properties across the United States. That is, the firm focuses on tenants in segments where a physical location is essential to the business, such as grocery stores, pharmacies, and discount stores. The company’s portfolio includes a diverse range of properties, strategically located in high-growth markets with stable demographics.
NETSTREIT seeks to create long-lasting relationships with its tenants and places emphasis on selecting properties with strong tenant credit profiles. That is a distinguishing feature, and the company is highly exposed to investment-grade rated tenants, which account for roughly 67% of operations, one of the highest-ranking in the peer group. In fact, NETSTREIT is second only to Agree Realty above.
It is, however, a rather smaller operation although revenue has also been steadily growing. The latest quarterly haul, for 1Q23, showed $29.45 million at the top-line, for a 38% year-over-year increase. The figure also outpaced analyst expectations by $1.32 million. Q1 AFFO of $0.30 also came in above the $0.28 forecast. Looking ahead, NETSTREIT stuck to its full year 2023 AFFO guide of $1.17 to $1.23 per share.
As for the dividend, the quarterly payout currently stands at $0.20 per share, where it has been since November 2020, not long after the company’s August 2020 public debut. The dividend provides a yield of 4.61%.
For Stifel analyst Simon Yarmak, the company’s value proposition is clear. “NTST has an attractive defensive focused portfolio, which we believe is well positioned for the current environment and the long term. In our opinion, the company’s smaller relative size should result in the strongest AFFO growth in the space,” he explained. “Led by a management team of seasoned commercial real estate executives, NETSTREIT’s strategy is to create the highest quality net lease retail portfolio in the country with the goal of generating consistent cash flows and dividends for its investors.”
These comments underpin Yarmak’s Buy rating on NTST and $21.50 price target. Should that figure be met, in a year’s time, investors will be sitting on returns of ~20%. (To watch Yarmak’s track record, click here)
Turning now to the rest of the Street, where NTST’s Strong Buy consensus rating is based on a total of 4 Buys vs. 1 Hold. At $21.70, the average target is almost identical to Yarmak’s objective. (See NTST stock forecast)
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