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4 REITs to Pick as Fed Indicates Low Rates for Prolonged Time

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The Federal Reserve, in its commitment to support economic recovery, at the recently-concluded meeting, has not only decided to keep interest rates near zero but also hinted at anchoring the rate at a low level for a prolonged period until inflation shows a consistent rise and the labor market achieves maximum employment.

In setting a higher hurdle for any rate hike, the Fed has, in fact, clearly pointed out that apart from seeking the labor market to return to maximum employment, it would allow interest rates to run “moderately above” 2% for some time such that “inflation averages” 2% over time, before raising rates to control it.

Achieving these conditions would take time and among the central bank officials who participated in the meeting, all expect to keep rates near zero at least through 2021, while 13 of them project rates to stay at such an ultra-low level through 2023 as well.

This low-rate environment brings REITs on the forefront. This is because REITs’ dependence on debt for business keeps investors optimistic about their performance in a low-rate environment as the companies benefit from low borrowing costs. Moreover, low interest rates contribute to higher valuations. Also, REITs are often treated as bond substitutes for their high-dividend paying nature.

Furthermore, allowing the inflation to run above 2% for some time before stepping into any rate hike mode comes as a tailwind for this hybrid asset class. This is because REITs offer protection from inflation as both rents and valuations get a boost when prices flare up, in turn supporting cash flows from their properties and driving dividend growth. In addition, maximum employment essentially indicates a fatter purse and higher capability of tenants to pay out for rents.

Thus, this low rate environment and allowing the inflation rate to run moderately above the past level set the perfect stage for REITs to achieve higher returns in the years ahead. Real estate companies are essential for our existence and therefore, although the pandemic and rent-collection woes might have raised eyebrows for lodging and retail landlords as well as some other asset categories, there are chances of gaining elsewhere.

Particularly, the coronavirus outbreak has led to the adoption of physical distancing, activities in the virtual space have skyrocketed. And REITs are ought to gain from this trend because even virtual activities need real spaces.

Take for example the rising work-from-home trend, as businesses need to run despite people compelled to stay indoors. This temporary adoption of work-from-home practices is expected to make it a broader trend. Even the virtual delivery of education as well as online consumption of entertainment will likely continue for the foreseeable period. Moreover, though online purchasing has been gaining popularity in recent years, it is the pandemic that has proved significantly beneficial for the e-commerce players with soaring business volumes as shoppers prefer to keep away from retail stores to be safe.

Remarkably, all these virtual/online activities ultimately need real spaces, i.e. critical infrastructures, right from cell towers, to data centers as well as warehouses for their functioning, and REITs own several of these real estates. Therefore, focusing on data-center REITs like Digital Realty (DLR - Free Report) , and tower REITs like American Tower Corporation (AMT - Free Report) and Crown Castle International Corp. (CCI - Free Report) , makes sense, while betting on some industrial REITs seems prudent currently.

Stocks to Consider

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

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

Duke Realty Corp. is a domestic pure-play industrial REITengaged in owning, managing and developing industrial properties across the United States. With approximately 156 million rentable square feet of industrial assets in 20 major logistics markets, this industrial REIT is likely to keep witnessing solid demand from e-commerce and traditional distribution customers. The Zacks Consensus Estimate for the ongoing-year funds from operations (FFO) per share moved 3.5% upward over the past two months to $1.49. It also calls for 3.5% year-over-year growth.

Industrial Logistics Properties Trust (ILPT - Free Report) is focused on the ownership and leasing of industrial and logistics properties, primarily in the United States. Healthy fundamentals of the industrial and logistics market keep supporting the company’s growth, with the REIT delivering a surprise of 2.17% during the April-June quarter in terms of FFO per share. The Zacks Consensus Estimate for this year’s FFO per share has been revised 4.5% upward in two months’ time to $1.87. It also suggests a year-over-year improvement of 6.3%.

Terreno Realty Corporation (TRNO - Free Report) targets functional buildings at in-fill locations, which enjoy high-population densities and are located near high-volume distribution points. Backed by such efforts, the company is well poised to fortify its portfolio in the six major coastal U.S. markets — Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami and Washington, DC — which display solid demographic trends and witness healthy demand for industrial real estates. The Zacks Consensus Estimate for 2020 FFO per share moved marginally north over the past month to $1.44. It also indicates 4.4% year-over-year growth.

Rexford Industrial Realty (REXR - Free Report) is focused on acquisition, ownership and operation of industrial properties situated in Southern California in-fill markets. The Zacks Consensus Estimate for its current-year FFO per share has been revised 1.6% upward over the past 60 days. This also indicates a year-on-year improvement of 4.1% on estimated revenue increase of 15.3%.

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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