Top Two Stocks with Substantial Potential Growth by 2025
Last year, the stock market continued its robust performance, with the S&P 500 and Nasdaq Composite posting impressive gains of 23% and 29%, respectively. However, not all sectors fared equally well. The real estate investment trust (REIT) sector, in particular, lagged behind due to the impact of higher interest rates, leading to a weaker performance in the REIT sector as a whole.
Despite the challenges, I believe that 2023 will mark a turning point for the REIT sector, particularly in the real estate investment trust (REIT) sector, with two strong contenders leading the charge: Medical Properties Trust (MPW) and Rexford Industrial Realty (REXR).
The Comeback Kid: Medical Properties Trust (MPW)
Medical Properties Trust has faced a challenging few years, with financial problems exacerbated by surging interest rates and tenant-related issues. Two of the REIT's largest tenants filed for bankruptcy, leading to a significant loss of rental income and liquidity concerns. Despite these setbacks, there are signs of a comeback on the horizon.
In late 2022, Medical Properties Trust regained control of its real estate from one of its bankrupt tenants and replaced it with five financially sound operators. These new tenants are expected to start paying rent by the end of the year, with rates steadily increasing to reach a fully stabilized level by the end of 2024. Furthermore, the company has worked to bolster its liquidity by raising around $3 billion through asset sales and refinancing, enabling it to repay $2.3 billion of debt over the past two years and addressing future maturities.
The REIT still has one more tenant bankruptcy to navigate this year, but its portfolio and financial situation are steadily improving. Its rental income should continue to rise, enhancing its financial flexibility, and lower interest rates occurring as the Federal Reserve continues cutting them should make it easier for the REIT to refinance debt in the future. These catalysts should start alleviating the pressure on its stock price this year, potentially paving the way for a rally.
The Phoenix of REITs: Rexford Industrial Realty (REXR)
Rexford Industrial Realty's shares took a dip in 2022, with declines of more than 30% last year and about 50% over the past three years. This slump can be attributed to a slight ease in the Southern California industrial real estate market, which is Rexford's primary focus. As a result, vacancies increased slightly, weighing on the growth in same-property net operating income (NOI), which rose only 2.7% in the period.
However, Rexford Industrial Realty remains optimistic, citing the strong long-term tenant demand fundamentals of the infill Southern California industrial market and expecting the market to rebound as the economy and political environment stabilize. Even if rents don't grow at a blistering pace, Rexford's embedded growth drivers—repositioning/redevelopment projects, rental increases, and secured acquisitions—will add around 34% to its NOI over the next three years. If market rents resume their growth and the REIT secures additional accretive acquisitions, that number could be even higher.
The Flight to Future Gains: REITs in 2025
With interest rates and other negative impacts slowly subsiding, the heavy weight on Medical Properties Trust and Rexford Industrial Realty's stock prices should start to lighten in 2025. With improved financial performance, solid growth prospects, and attractive yields, these REITs have the potential for significant upside this year.
Enrichment Insights:
- Tenant-related issues in the REIT sector have been a major factor contributing to underperformance. This includes high-profile bankruptcies, such as Steward Health Care and Prospect Medical, affecting companies like Medical Properties Trust.
- Higher interest rates from the Federal Reserve's efforts to control inflation have impacted certain sectors, including housing and durable goods, and REITs in general.
- The political and economic uncertainties caused by a new administration can impact public sector employment and infrastructure investment, negatively impacting REIT performance.
- Changing demographics and the impact of artificial intelligence (AI) are challenging REITs by altering demand patterns and operational efficiencies.
Source: Enrichment Data Gathered from NapoleonCat, NewsBase, Vogue Financial, Mullen & Associates, Zacks Investment Research, and The Motley Fool.
In light of these challenges, investors looking to capitalize on potential future gains might consider reinvesting in REITs like Medical Properties Trust and Rexford Industrial Realty, given their resilience and growth prospects. Proactively managing money in the finance sector, by diversifying investments across different sectors and focusing on companies with strong fundamentals and strategic growth plans, could yield favorable returns.
