As is par for historical precedent, rising interest rates are pinching the real estate sector this year, but it’s not all bad news for investors.
A clear silver lining is emerging in the form of more attractive valuations on a variety of real estate investment trusts (REITs) – something that’s often hard to come by in a sector prized for its defensive positioning and above-average levels of income.
Market participants can leverage active management to their real estate equity benefit with the Virtus Duff & Phelps Global Real Estate Securities (VGISX). The fund, which is more than 13 and a half years old, carries an overall rating of five stars from Morningstar.
“The good news for investors looking to put cash to work is that, thanks to their steep share price declines, many of these high-yielding stocks are now trading at big discounts compared with where Morningstar’s equity analysts peg their fair value,” notes Morningstar analyst Lauren Solberg.
Indeed, some of the marquee components in VGISX fit the bill as attractively valued today. Those include apartment REIT AvalonBay Communities (NYSE: AVB) and Prologis (NYSE: PLD). At the end of the second quarter, Prologis and AvalonBay Communities were VGISX’s largest and ninth-largest holdings, respectively, combing for 9% of the mutual fund’s weight, according to issuer data.
“We are concerned that high supply may limit the company’s ability to realize significant internal growth for a few years, but long term we think that AvalonBay should see higher than industry average growth as demand remains strong and the new development pipeline starts to produce significant returns on investment,” said Morningstar analyst Kevin Brown regarding AvalonBay.
Healthcare facilities REIT Welltower (WELL), the fourth-largest holding in VGISX, is another member of the fund’s portfolio that’s undervalued. However, the shares are on the mend following a drubbing at the hands of the coronavirus pandemic in 2020.
“However, month-over-month occupancy improved through 2021 as vaccination rates went up, and we remain optimistic about the sector’s longer-term prospects given that the industry should eventually recover from the impact of the virus, supply has started to fall below the historical average and will remain low for several years, and the demographic boon will create a massive spike in demand for senior housing,” adds Brown.
As an active fund, VGISX can be more responsive to REIT valuation opportunities than passive rivals, indicating its valid idea for income and value-seeking investors alike.
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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.