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4 Industrial REITs That are Resilient to Coronavirus Crisis

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We are in the heart of the current reporting cycle and the REIT industry is buzzing with activity, with a number of earnings releases scheduled for this week and the next. Fundamentals of the underlying asset categories will, undoubtedly, keep playing key role in determining REITs’ performance, and industrial REIT is one such sector which is poised to stand out. Despite the pandemic wreaking havoc across industries, this sector has logged in a gain of 7.65% so far in the year, per data from REIT.com, with adequate room for decent gains in the upcoming days as well.

It is no secret how the industrial real estate asset category has been playing a crucial role in recent years in the growing e-commerce market, transforming the way how consumers shop and receive their goods. Services like same-day delivery are gaining traction, and last-mile properties in high-income urban areas have been witnessing solid pricing, occupancy and growth in rentals.

And now, social-distancing measures that are fueling online orders, in turn, substantially boosting e-commerce’s share of total retail sales, and spurring demand for warehouse and distribution space, have become the icing on the cake. Also, apart from e-retail, companies are making strategic moves to improve their supply-chain efficiencies, propelling demand for logistics infrastructure and efficient distribution networks.

Per a CBRE Group (CBRE - Free Report) report, the industrial real estate market showed resilience in the second quarter amid the coronavirus crisis on low vacancy rates, record high-asking rents and positive net absorptions.

The overall industrial net absorption totaled 19.2 million square feet, while average asking rents continue to increase. Average asking rents finished the mid-year at $7.96 per square feet, marking a 6.3% increase year on year. Moreover, warehouse/distribution rents logged in an increase of 5.6% year on year to an average of $6.68 per square feet. Encouragingly, these rates represent the all-time highs. In addition, the asset category has a near-record low overall vacancy rate of 4.7%.

Moreover, when rent collection issues have grappled the entire real estate market, it is the industrial sector that seems to have emerged as the strongest performer so far. Per a survey conducted by Nareit in the wake of the pandemic and related economic dislocation, the sector made collections of more than 99% of typical July rents. Moreover, the survey respondents reported deferral of only 1% of sector rent in June and July, thereby instilling faith about its cash-flow generation capability.

Further, developers are bullish on this asset category. In addition, projects under construction climbed to 309.7 million square feet in the second quarter from 298 million square feet in the first, with roughly 36% of this space being preleased.

The industrial real estate space is expected to benefit over the long run, from a likely increase in inventory levels post the coronavirus crisis, apart from the fast adoption of e-commerce. Particularly, diversification of supply chains away from China as well as companies intending to maintain higher levels of inventory as a precaution for any supply-chain disruptions will likely keep the demand for industrial real estate high.

Stocks to Consider

Here we have picked four industrial REITs using the Zacks Screener. Apart from having robust fundamentals, these REITs have higher chances of market outperformance. Further, the stocks, each carrying a Zacks Rank #2 (Buy), have been witnessing positive estimate revisions, reflecting analyst optimism.

Prologis (PLD - Free Report) is a leading industrial REIT that acquires, develops, operates and manages industrial properties in the United States and across the globe. The stock delivered a surprise of 12.1% in terms of funds from operations (FFO) per share in the second quarter on growth in rental income and healthy occupancy level. The company has also revised the full-year core FFO per share guidance upward from the one issued in April.

Duke Realty Corp. (DRE - Free Report) is engaged in owning, managing and developing industrial properties across the United States. The domestic pure-play industrial REIT’s capacity to bank on this favorable trend is likely to have resulted in active leasing and healthy rent levels across a number of properties during the June-end quarter. Its diversified portfolio of 156 million rentable square feet, spread across coastal ports to thriving inland hubs, might have witnessed solid demand from e-commerce and traditional distribution customers for the company’s industrial properties.

Duke Realty is slated to report quarterly results on Jul 29. The Zacks Consensus Estimate for second-quarter revenues is pegged at $221.3 million, indicating a year-over-year improvement of 3.8%, while the FFO per share estimate of 37 cents suggests an increase of 2.8%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PS Business Parks (PSB - Free Report) is into ownership, acquisition, development and operation of commercial real estate properties, especially multi-tenant industrial, flex and office space. This REIT is poised to excel as the industrial real estate market is witnessing improving fundamentals amid an e-commerce boom and supply-chain strategy transformations.

PS Business Parks is scheduled to report second-quarter figures on Aug 4. The company’s Zacks Consensus Estimate for the quarterly FFO per share has moved 5.7% north to $1.66 in a month’s time.

Rexford Industrial Realty (REXR - Free Report) is focused on acquisition, ownership and operation of industrial properties situated in Southern California in-fill markets. The company’s performance during the April-June quarter reflects a 6.7% increase in core FFO per share on better-than-expected revenue growth.

Despite the pandemic, it registered continued internal and external growth. Also, the Zacks Consensus Estimate for full-year FFO per share has moved marginally north over the past week to $1.27.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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