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Analyst Blog

Speculation regarding the timing of the next rate hike has kept the real estate investment trust (“REIT”) sector on tenterhooks. However, the possibility of another hike has been doing the rounds since the last rate hike in Dec 2015. And any further hike in rates will adversely affect the REIT industry. (Read: REIT Stocks in Free Fall, Thanks to Rate Hike Speculation)

Now, the chances of a hike have increased. Currently the job market is robust and near to the full employment level. Further, the rate of inflation is close to the target level and is likely to gather pace. The global economy and the financial markets, are now better placed, raising the possibility of a rate hike.

Currently, the target range of a hike is between 0.25% and 0.50% and majority of the policymakers expect a rise in rates by 0.25% before the end of 2016.

Notably, there is an inverse relationship between rate of interest and the REIT sector. An increase in interest rate raises borrowing costs for REITs, which in turn, negatively impacts their profitability. Moreover, REITs are viewed as dividend-yielding investments. A rise in interest rate puts pressure on dividend yields, thereby making REIT stocks less attractive.

REITs to Avoid

Given such a situation, when the odds of a rate hike are quite high, it is time to be extra cautious about keeping REIT stocks in your portfolio. Here we have selected few potentially risky REIT stocks by using the Zacks Screener. Among the sell rated (Zacks rank # 4 or 5) REITs, stocks with negative three to five year earnings growth have been taken. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We have further narrowed down the list on the basis of Value Style Score. We have selected only those with Value Score of more than C.

Newton, MA-based Select Income REIT (SIR - Free Report) is a residential REIT formed to primarily own and invest in net leased, single tenant properties.

Zacks Rank: #4
% Change F1 Est. (four weeks) = -1.24%
Value Score= C

LTC Properties Inc. (LTC - Free Report) is a Westlake Village, CA-based health care REIT which mainly invests in long-term care and other health care related facilities.

Zacks Rank: #4
% Change F1 Est. (four weeks) = -0.07%
Value Score= D

Milwaukee, WI-based Physicians Realty Trust (DOC - Free Report) is a healthcare REIT which is engaged in acquiring, developing, owning and managing healthcare properties.

Zacks Rank: #4
% Change F1 Est. (four weeks) = -0.26%
Value Score= F

Investors Real Estate Trust (IRET - Free Report) is a Minot, ND-based REIT, primarily engaged in investment and operation of the real estate assets.

Zacks Rank: #4
% Change F1 Est. (four weeks) = -4.1%
Value Score= C

Washington, DC-based Easterly Government Properties, Inc. (DEA - Free Report) is mainly focused on the acquisition, development and management of commercial properties in the U.S.

Zacks Rank: #4
% Change F1 Est. (four weeks) = 0%
Value Score= D

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