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Do Rising Rates Spell Doom for All REITs? Not By a Longshot
Real Estate Investment Trusts (REITs) have had a rough go of it lately, due mostly to the effects of steadily rising interest rates.
Because REITs are a bundle of real properties (plus sometimes mortgages and debt products in which real estate holdings are the primary collateral) and pay dividends based on predictable cash flows, their prices tend to mirror the behavior of bonds.
When interest rates rise, the price of bonds fall, as their coupon rate looks relatively less attractive when compared to the coupon on newly issued debt securities that pay higher rates. The same concept applies to REITs when the income they produce for investors begins to look less competitive compared to bonds and other income producing securities.
It’s easy to understand why the past year has been a difficult period for REITs.
Not all REITs are created equal, however. It’s important to look at a financial metric not commonly used with ordinary equity securities – Funds From Operations (FFO). Because REITs typically pay out the majority of income they receive from leasing properties to shareholders as dividends, FFO is an important indicator of their continued ability to pay the dividend.
Plymouth Industrial REIT, Inc, focuses on the acquisition and management of distribution centers, warehouses and light-industrial properties. They recently surprised the market, reporting Q1 earnings of $0.27/share, beating the Zacks Consensus Estimate of $0.18 buy a full 50%. Estimates for 2018 have risen to $1.27/share from $0.88/share just 7 days ago, and Plymouth is a Zacks Rank #1 (Strong Buy).
Plymouth also raised guidance on revenues and operating income for 2018.
Significantly, Plymouth reported Q1 FFO of $2.1M for the quarter, a huge improvement from -$134K a year ago. This reflects favorably on Plymouth’s ability to continue paying it’s huge 8.7% dividend.
Arbor Realty Trust invests in real estate related loans, preferred equity in real estate companies and mortgage related securities, rather than in the physical properties themselves.
Because of its position as a lender in the real estate market, Arbor Trust is in a unique position to benefit from rising rates, lending at higher rates as it retires older notes.
Arbor Trust is a strong earner, beating the Zacks Consensus Estimate in each of the past 4 quarter by an average of 22%. Rising estimates earn Arbor a Zacks Rank #! (Strong Buy).
With an 8% dividend and currently trading at a forward P/E ratio of 10.5X (versus an average of 15.2X for its peers), Arbor is both a great income investment and an excellent value proposition.
Real Estate Investment Trusts present a unique set of risks and rewards and investors need to understand the differences from traditional equities, but as a way to an income and value to a diversified portfolio, strong performing REITs that have been beaten down with the industry lately might be just the thing.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: Plymouth Industrial and Arbor Realty
For Immediate Release
Chicago, IL – May 10, 2018 – Today, Zacks Investment Ideas feature highlights Features: Plymouth Industrial REIT, Inc (PLYM - Free Report) and Arbor Realty Trust (ABR - Free Report) .
Do Rising Rates Spell Doom for All REITs? Not By a Longshot
Real Estate Investment Trusts (REITs) have had a rough go of it lately, due mostly to the effects of steadily rising interest rates.
Because REITs are a bundle of real properties (plus sometimes mortgages and debt products in which real estate holdings are the primary collateral) and pay dividends based on predictable cash flows, their prices tend to mirror the behavior of bonds.
When interest rates rise, the price of bonds fall, as their coupon rate looks relatively less attractive when compared to the coupon on newly issued debt securities that pay higher rates. The same concept applies to REITs when the income they produce for investors begins to look less competitive compared to bonds and other income producing securities.
It’s easy to understand why the past year has been a difficult period for REITs.
Not all REITs are created equal, however. It’s important to look at a financial metric not commonly used with ordinary equity securities – Funds From Operations (FFO). Because REITs typically pay out the majority of income they receive from leasing properties to shareholders as dividends, FFO is an important indicator of their continued ability to pay the dividend.
Plymouth Industrial REIT, Inc, focuses on the acquisition and management of distribution centers, warehouses and light-industrial properties. They recently surprised the market, reporting Q1 earnings of $0.27/share, beating the Zacks Consensus Estimate of $0.18 buy a full 50%. Estimates for 2018 have risen to $1.27/share from $0.88/share just 7 days ago, and Plymouth is a Zacks Rank #1 (Strong Buy).
Plymouth also raised guidance on revenues and operating income for 2018.
Significantly, Plymouth reported Q1 FFO of $2.1M for the quarter, a huge improvement from -$134K a year ago. This reflects favorably on Plymouth’s ability to continue paying it’s huge 8.7% dividend.
Arbor Realty Trust invests in real estate related loans, preferred equity in real estate companies and mortgage related securities, rather than in the physical properties themselves.
Because of its position as a lender in the real estate market, Arbor Trust is in a unique position to benefit from rising rates, lending at higher rates as it retires older notes.
Arbor Trust is a strong earner, beating the Zacks Consensus Estimate in each of the past 4 quarter by an average of 22%. Rising estimates earn Arbor a Zacks Rank #! (Strong Buy).
With an 8% dividend and currently trading at a forward P/E ratio of 10.5X (versus an average of 15.2X for its peers), Arbor is both a great income investment and an excellent value proposition.
Real Estate Investment Trusts present a unique set of risks and rewards and investors need to understand the differences from traditional equities, but as a way to an income and value to a diversified portfolio, strong performing REITs that have been beaten down with the industry lately might be just the thing.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.