Real estate stocks are lagging the market, but here’s one corner in particular where Janus Henderson sees an undervalued opportunity. Overall, real estate stocks have started to recover, with the S&P 500 real estate sector rallying 10% in the past month. But it’s one of the index’s worst-performing sectors year-to-date, up about 5% compared with the S&P’s 19% gain through Thursday. However, there is one sector that has fared worse than many of its peers: industrial real estate investment trusts. Greg Kuhl, a portfolio manager in Janus Henderson’s global real estate equity team, believes that’s about to change. “Supply is going to come down really dramatically towards the second half of this year and into next year – and it looks like demand in the right types of products and in the right submarkets is holding up just fine,” he explained. “There are some really interesting opportunities.” REITs can also pay attractive dividends. .SPLRCR YTD mountain S & P 500 Real Estate Sector year to date As the name suggests, industrial REITs own, manage and lease space in industrial facilities. The benchmark Janus uses for the overall REIT sector is the FTSE Nareit Equity REITs, which track US commercial real estate. However, its industrial REIT index has a total return of -0.75% so far this year. The sector was hit in April after industrial property giant Prologis cut its full-year outlook, citing economic uncertainty and delayed leasing decisions. However, in July, the company raised full-year guidance . Meanwhile, manufacturing data shows that supply will decrease, Kuhl noted. That said, he is selective in the subfield. “In our view, the supply/demand fundamentals are more favorable in the Sun Belt and Midwest markets today compared to the coastal markets, especially California,” he said. California is the largest industrial market in the US, he added. One of its biggest industrial overweights is EastGroup Properties, which has exposure to the Sun Belt. The company, which has a dividend yield of 2.69%, owns smaller building sizes. “Some of the Sun Belt markets, as we all know, there’s population growth and the product that EastGroup owns, you could call it ‘last mile industrial’ — closer to where people live, it’s smaller — there’s a lot of demand for it,” Kuhl said. “You’re not just trying to lease to Amazon or FedEx… you can also lease to a lot of small, locally based businesses.” EGP YTD mountain EastGroup Properties year to date Another name Kuhl likes is First Industrial Realty Trust , which has national and coastal exposure and trades at a significant discount to its peers, he said. The stock has a dividend yield of 2.69%. While the company has several properties in California that are not yet leased, it has the advantage that the buildings were done at a very low cost, he noted. “They can go out and charge a market rent for a building that’s currently vacant and, all of a sudden, it’s generating income for them,” Kuhl explained. “We don’t think that’s priced into the stock.” FR YTD mountain First Industrial Realty Trust year to date Also encouraged by Lineage’s initial public offering , which began trading on July 25 on the Nasdaq. It is the market’s biggest IPO so far this year. Lineage, ranked No. 46 on the 2024 CNBC Disruptor 50 list, is the world’s largest temperature-controlled warehouse REIT. “Cold storage is a niche area within the industry that we like and where the supply/demand fundamentals are also more favorable than the onshore traditional industry,” Kuhl said. The stock is up more than 10% from its IPO price of $78, as of Thursday’s close. “This is a positive sign for industrial REITs and just REITs in general,” Kuhl said.
