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REITs Record Growth in FFO in Q2, Occupancy Remains High

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With the Q2 earnings season on its last leg, this is the right time to gauge the performance of the real estate investment trust (REIT) industry.

Admittedly, rate hikes and a cautious approach of investors have affected gains in this industry so far this year. However, investors need to keep in mind that operating performance of this special hybrid asset is highly determined by the dynamics of the individual asset categories. A number of asset categories displayed strength in second-quarter 2017, with the economy and the job market showing signs of recovery.

In fact, per a NAREIT media release, occupancy rates remained high in the second quarter, while funds from operations (“FFO”), a widely used metric to gauge the performance of REITs, reported growth.

Specifically, the Q2 scorecard reveals that the total FFO of the listed U.S Equity REIT industry of $15.6 billion in the reported quarter increased 7.9% sequentially. The figure also came in 7.3% higher than the prior-year quarter tally.

Same-store net operating income (NOI) reported 3.3% year-over-year growth. Results were driven by segments like Single Family Homes, Data Centers and Manufactured Home Communities, which witnessed robust same-store NOI growth of 6.8%, 5.8% and 5.7%, respectively.

Furthermore, properties owned by the listed Equity REITs enjoyed solid occupancy levels. In fact, the occupancy rate remained unchanged at 93.4%, slightly below the record high occupancy rate of 93.7% recorded in the third and fourth quarters of 2016.

Admittedly, growth in cloud computing, Internet of Things and big data is not only helping tech companies, but also driving demand for data center REITs. Moreover, the industrial asset category hogged the limelight for experiencing high demand, with the economy and job market displaying signs of recovery, ecommerce gaining strength, and the manufacturing environment remaining healthy.

Also, the residential real estate market benefited from healthy demand levels and a delay in deliveries that kept the supply number in check. No doubt, the shrinking mall traffic and store closures amid aggressive growth in online sales kept retail REITs on tenterhooks. However, retail REITs managed to grab attention from new and productive tenants, and were able to replace with the ones which departed.

Among the S&P 500 REIT constituents, data center REIT Digital Realty Trust, Inc. (DLR - Free Report) and industrial REIT Prologis, Inc. (PLD - Free Report) delivered better-than-expected results in the quarter, with positive surprises of nearly 3.4% and 7.7%, respectively, in terms of FFO per share. Also, retail REIT Simon Property Group, Inc. (SPG - Free Report) and residential REIT Essex Property Trust, Inc. (ESS - Free Report) surpassed estimates, registering positive surprise of 1.2% and around 1.7%, respectively.

Currently, Digital Realty, Prologis, Simon Property Group and Essex Property carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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