Demand for warehousing and storage facilities increases are boosting the real estate industry. Moreover, the global retail REITs market is also being driven by the emergence of self-storage services and rising demand for logistics services.

Retail REITs are a popular option for investors who want to diversify their portfolio and hedge against stock market volatility. Therefore, considering the current macroeconomic headwinds, I think REIT retailer Saul Centers, Inc. (BFS), which is top-ranked in the REIT-Retail group in our proprietary rating system, presents a compelling investment opportunity this month.

Experts believe that despite an uncertain macroeconomic outlook, REITs are in a solid position to deploy capital, thanks to their strong balance sheets. Bankers also expect improvements in REIT debt and equity issuance, with possibilities of increased IPO activity and M&A later in the year.

As per Technavio’s report, the global REIT market is projected to expand at a CAGR of 2.8% to reach $333.01 billion between 2022 and 2027.

BFS is a self-managed, self-administered equity REIT that currently operates and manages a real estate portfolio comprised of 61 properties which include 57 community and neighborhood shopping centers and mixed-use properties with approximately 9.8 million square feet of leasable area.

The REIT had a strong financial performance during the fiscal fourth quarter and fiscal year 2022 with substantial growth in its core business operations.

It has gained marginally over the past five days to close the last trading session at $35.70.

Here’s what could shape BFS’ performance in the near term:

Focus On Growth and Expansion

In late January this year, an affiliate of BFS announced that it was planning to redevelop a low-density block in Bethesda with a mixed-use mid-rise comprising 350 residential units and 15,000 sq ft of retail.

The project had been approved by the Planning Board and is situated in the northern part of Montgomery County’s 2017 adopted Bethesda Downtown Plan. The surrounding area has seen a steady flow of new developments recently, including Aksoylu Properties’ Artena and JBG Smith Properties’ 8001 Woodmont.

Stable Dividend Distribution

BFS recently declared a quarterly dividend of $0.59 per share on its common stock, representing a 3.5% increase over the prior-year quarter. The REIT also paid dividends of $0.383 and $0.375 per depository share on its preferred stocks.

BFS pays an annual dividend of $2.36 per share, translating to a yield of 6.55% at the current price, which is higher than its 4-year average dividend yield of 5.31%. Its dividend payouts have grown at a 3.6% CAGR over the past three years.

Robust Financials

During the fiscal fourth quarter that ended December 31, 2022, BFS’ same property revenue increased 3.5% year-over-year to $62.34 million and same property operating income increased 1.1% from the prior-year quarter to $11.99 million. Its net income and net income per share amounted to $15.39 million and $0.38.

During the fiscal year 2022, its total revenue increased by 2.8% year-over-year to come in at $245.86 million. BFS’ net income available to common stockholders increased by 4.9% year-over-year to $39 million.

The REIT’s FFO available to common stockholders increased 2.4% year-over-year to $103.17 million, mainly due to higher base rent, lower interest expenses, and credit losses on operating leases receivable.

Favorable Revenue Estimates

Street expects BFS’ revenue for the fiscal year ending December 31, 2022, to increase by 3.2% year-over-year to $253.60 million. The company’s revenue for the fiscal first quarter that ended March 2023 is expected to rise 3.4% from the previous-year quarter to $64.25 million.

Moreover, the company has an impressive record of surpassing consensus revenue estimates, exceeding the same in three of the trailing four quarters.

High Profitability

BFS’ trailing-12-month EBIT margin of 44.73% is 106.2% higher than the 21.69% industry average. Its forward AFFO payout ratio and trailing-12-month asset turnover ratio of 93.65% and 0.14x are 23.3% and 8.1% higher than the 75.97% and 0.13x industry averages.

Furthermore, the company’s trailing-12-month ROCE, ROTC, and ROTA of 17.91%, 4.02%, and 2.74% are higher than the industry averages of 4.07% and 2.10%, and 2.03%, respectively.

POWR Ratings Reflect Positive Outlook

BFS’ overall B rating translates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BFS has a B grade for Sentiment, in sync with optimistic revenue estimates.

It is ranked first among 30 REITS in the REITs – Retail category.

To access BFS’ additional ratings for Growth, Value, Momentum, Stability, and Quality, click here.

Bottom Line

BFS’ solid fiscal year 2022 performance indicates that BFS is a stable and growing company in the real estate industry. Also, its revenue and levered free cash flow have grown at CAGRs of 2% and 6% over the past three years.

Moreover, in the past year, Bernard Saul, Chairman & CEO of BFS, purchased $60 thousand worth of shares at a price higher than the current share price, suggesting insider optimism about the company’s prospects. Additionally, it’s worth noting that the REIT’s insiders only bought shares last year and did not sell any.

With a favorable growth trajectory, recent expansion plans, high profitability, and a steady dividend distribution, BFS might be the top pick for investors seeking a retail-focused REIT this month.

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REVISED: 2023 Stock Market Outlook > 

BFS shares were unchanged in premarket trading Tuesday. Year-to-date, BFS has declined -9.62%, versus a 8.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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