The Fed is poised to cut interest rates, US stock REITs embrace a good opportunity! Wedbush focuses on these targets

According to the Zhitong Finance and Economics APP, as traders and investors are almost 100% certain that the Fed rate cut cycle will begin in September, the well-known Wall Street investment firm Wedbush Securities has started covering four real estate investment trusts (REITs) focused on net leasing in the US stock market for the first time. Among them, the firm has given "outperform the market" ratings to Essential Properties Realty Trust (EPRT.US) and Broadstone Net Lease (BNL.US), and "neutral" ratings to NETSTREIT (NTST.US) and Realty Income (O.US).

The Wedbush analyst team stated in a recent report: "Although the overall pace of the real estate transaction market has been slow in the past 18-24 months, REITs focused on net leasing largely rely on tenant relationships to continue external growth momentum, with stability stronger than real estate stocks."

The overall trend of the Fed lowering interest rates may help improve the capital costs of the entire real estate industry. The Wedbush Securities report stated that private investors may rejoin the competition, which could affect market trading volume and yield ceilings. "Therefore, we are in a positive industry growth trend," the firm's analysts said.

In the eyes of most Wall Street investment institutions, during the Fed rate cut cycle, REITs that provide regular income for investors are usually more suitable for investment than pure real estate stocks. These institutions recommend that investors focused on real estate prefer investing in REITs.

The price volatility of real estate stocks is usually much higher than that of REITs because they directly reflect the supply and demand situation of the real estate market and company performance. REITs, on the other hand, have relatively lower price fluctuations due to their diversified investments and stable rental income streams. REITs as assets provide more stable dividend income, making them more attractive to investors seeking stable cash flow. In the current period of uncertain US economic growth, REITs have stronger defensive properties and more stable performance.

Historical statistical data shows that REITs typically perform well during Fed rate cut cycles because they benefit from lower financing costs and stable high dividend yields.

REITs typically rely heavily on borrowing to fund their real estate investments and operations, and a Fed rate cut significantly lowers borrowing costs, allowing REITs to finance at lower rates, directly improving their profitability. During a rate cut cycle, as bond and deposit rates decline, high-yield and stable REITs begin to attract investors to allocate some of their deposits to such assets, potentially driving more investors to purchase REITs and push up their trading prices.

Wedbush Securities stated in the report that Essential Properties Realty Trust's inherent advantages in equity capital costs and higher average acquisition yield ceilings are expected to bring sustained profit growth trends, at least in the short term Broadstone Net Lease's investment portfolio simplification strategy aims to reduce healthcare-related risk exposure from 17.6% to 7.1%, with an expected multiple premium valuation by 2025 and a return to a strong profit growth trend.

Meanwhile, Wedbush stated that due to some existing tenant issues, NETSTREIT, a REIT in the US stock market, has been under pressure recently, which may result in an acquisition scale lower than the institution's expectations.

Wedbush also mentioned that considering the enterprise value scale of approximately $80 billion, Realty Income, another REIT, may find profit growth more challenging due to the recent expansion of average acquisition yield limits through European investments. Additionally, this investment institution indicated a declining trend in fixed asset acquisitions in 2024 compared to the same period last year.

In terms of stock price performance, the four REITs covered for the first time by Wedbush have all recorded gains this year except for NETSTREIT, boosted by the strong expectations of a Fed rate cut. Essential Properties Realty Trust has shown the strongest performance this year, with a significant increase of up to 21%, outperforming the S&P 500 index