Performance of REIT stocks have been adversely affected in the year, so far, due to the rate hike issues, rising supply in certain asset categories, as well as a cautious approach of investors. But make sure not to ignore the chances of scooping big gains from this special hybrid asset class which also benefits from the favorable dynamics of the individual asset categories.
In fact, one such REIT stock which has been displaying strength is PS Business Parks Inc. (PSB - Free Report) . This Glendale, CA-based REIT is into ownership, acquisition, development and operation of commercial real estate properties, especially multi-tenant flex, office, and industrial assets. Its properties are mainly concentrated in California, Virginia, Florida, Texas, Maryland and Washington. The healthy fundamentals in these asset categories are anticipated to drive growth, while portfolio repositioning strategies are likely to help the company emerge stronger.
Further, this Zacks Rank #2 (Buy) stock has gained 14.2% year to date compared with 3.7% growth recorded by the industry it belongs to. The stock is likely to move higher in the near term, as there are a number of favorable factors.
Last month, the company reported better-than-expected second-quarter 2017 adjusted funds from operations (“FFO”) per share. The company’s adjusted FFO per share of $1.55, surpassed the Zacks Consensus Estimate of $1.52. Moreover, it came in 14% higher than $1.36 recorded in the prior-year quarter. The rise stemmed from higher net operating income ("NOI"), reduced interest expenses and savings from lower preferred distributions.
Further, the company reported improved operating fundamentals in the second quarter. In fact, amid an improving economy and solid job gains, there has been a healthy demand from small businesses for space. This helped it accomplish 2 million square feet of leasing in the second quarter, with rent growth of 3.2%. Further, increase in occupancy and rental rates helped the company report Same Park NOI increment of 5.2% year over year in the recently reported quarter. As of Jun 30, 2017, the company had wholly owned 28 million rentable square feet for around 4,900 customers.
Why a Solid Choice?
PS Business Parks’ FFO per share has been displaying strength for the past few quarters. The company reported better-than-expected FFO per share figures in each of the trailing four quarters, with an average positive beat of 3.16%. Also, over the last three-five years, PS Business Parks witnessed nearly 14.6% growth in FFO per share, as against nearly 1.8% increase of that of the industry. Furthermore, the company’s projected sales growth of 3.6% for 2017 is ahead of the industry’s expected growth rate of 3.4%, signaling brighter days ahead.
The Zacks Consensus Estimate for the current-year FFO per share has inched up 0.3% to $6.14, in a month’s time, reflecting analysts’ bullish sentiment on the stock. Further, the Zacks Consensus Estimate for 2018 FFO per share has moved up 0.6% to $6.40 during the same time frame, signaling brighter days ahead.
Moreover, the debt-to-equity ratio for PS Business Parks is 0.11 compared with the industry average of 0.84. This highlights greater financial stability for the company and lesser risk for shareholders.
Also, PS Business Parks’ Return on Equity (ROE) ratio is 15.8% compared with the industry average of 12.7%. This indicates that the company reinvests more efficiently compared to the industry.
Other Stocks to Consider
Other top-ranked stocks in the real estate space include Communications Sales & Leasing, Inc. (UNIT - Free Report) , InfraREIT Inc. (HIFR - Free Report) and Rexford Industrial Realty, Inc. (REXR - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While Communications Sales & Leasing and Rexford Industrial Realty have expected long-term growth rates of 7.5% and 6.8%, respectively, the expected long-term growth rate for InfraREIT is currently pegged at around 8%.
Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. 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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