While many real estate investment trusts (REITs) have had a rough start to the year along with the general market, that’s not the case with the highly-ranked REIT we will discuss below. REITs are lucrative investment vehicles and continue to be a great way to balance portfolios while gaining exposure to the real estate sector. Adding these incoming-producing investments can result in significant advantages over traditional real estate investing including increased liquidity, greater diversification, tax benefits and potentially higher returns with lower risk.

Real estate investment trusts either own or manage income-producing real estate, normally through directly investing in properties or the mortgages on those properties. The IRS mandates that REITs must pay out 90% of their taxable income to shareholders. This typically translates into much higher dividends than your average S&P 500 stock. One of the best ways to increase returns when investing in REITs is to compound the dividends received. Investors may also choose to utilize a Dividend Reinvestment Plan (DRIP), which automatically reinvests the dividends received into additional shares. 

Investors have the option to buy REITs directly, or may choose to further diversify by investing in REIT ETFs or mutual funds. REITs not only offer above-average yields, but also the potential for future price appreciation. One potential issue for REIT investors is their sensitivity to interest rates, and given the recent chatter surrounding more interest rate increases in the future, it begs the question – how have REITs performed in periods of rising rates?

We examined six different historical periods over a 30-year timeframe in which interest rates rose as measured by the 10-year treasury yield. During these times of increasing rates, REITs generated positive returns in four of them, while outpacing the general stock market in three of the cases. Our study shows that a rising interest rate environment does not translate to lower REIT prices. This is mainly due to the fact that during economic expansions, the value of the underlying real estate increases.

Image Source: Zacks Investment Research

Now that we’ve established REITs can outperform even in rising rate environments, let’s take a look at a high-performing REIT that is outperforming the broader market. This REIT is a Zacks Rank #1 (Strong Buy) with substantial exposure to the agricultural markets. It is a component of the Zacks REIT and Equity Trust – Other industry group, which currently ranks in the top 36% out of approximately 250 industries.

Investing in stocks within leading industry groups can provide a constant ‘tailwind’ to our investing success. Because this industry is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months. Also note the favorable valuation for this industry group below:

Image Source: Zacks Investment Research

Farmland Partners, Inc. (FPI Quick QuoteFPI - Free Report)

Farmland Partners operates as a real estate company that owns and acquires high-quality North American farmland. FPI makes loans to farmers that are secured by farm real estate. The company owns approximately 155,000 acres of farmland in 16 U.S. states. FPI has over 100 tenants and boasts 26 different crop types across its farms such as corn and soybeans.

FPI has delivered a trailing four-quarter average earnings beat of 6.39%. Analysts have increased their full-year EPS estimates by 3.85% in the past 60 days. The Zacks Consensus Estimate now stands at $0.27 per share, which would translate to a whopping 2,600% growth rate relative to last year. This REIT has advanced 18.92% year-to-date, easily outperforming the general market.

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What the Zacks Model Unveils

The Zacks Earnings ESP (Expected Surprise Prediction) identifies companies that have recently witnessed positive earnings estimate revision activity. The idea is that this more recent information can serve as a better predictor of the future, giving investors a leg up during earnings season. When combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.

With an Earnings ESP +20.0% and a Zacks Rank #1 (Strong Buy), an earnings beat may be in the cards for FPI investors when the company reports on August 3^rd.

Make sure to keep an eye on this high-performing REIT and how it performs during this rising interest rate era.