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REITs Report FFO Growth in Q1: 4 Solid Picks

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So what if the U.S. REIT industry did not have a smooth start this year with returns turning negative in the first two months? The sector not only rebounded in March, but was also in the positive territory in April despite the rate hike and high treasury yields. And now, it has emerged from the latest NAREIT media release that the operating performance of this special hybrid asset class was decent in Q1.  

Specifically, the Q1 scorecard reveals that funds from operations (FFO) totaled $15.3 billion, denoting a 3.6% increase on a sequential basis and growth of 6% year over year. Same-store net operating income (NOI) increased 2.5% year over year. Occupancy rates for all Equity REITs were high at 93.6% and managed growth of 18 basis points on a year-over-year basis, while it saw a slight sequential slip.

Among the top-performing Equity REIT property segments, Industrial, Manufactured Homes, Diversified and Office, witnessed robust same-store NOI growth of 5.6%, 4.8%, 4.1% and 3.5%, respectively, on a year-over-year basis.

No doubt, industrial REITs are firing on all cylinders and per a study by the commercial real estate services firm — CBRE Group Inc. (CBRE - Free Report) — availability fell for 31 straight quarters to 7.3% for the U.S. industrial market in first-quarter 2018. Moreover, with demand surpassing new supply, net asking rents climbed 1.9% in Q1 to $7.01 per square feet, denoting the highest level since 1989.

In fact, to support e-commerce business, address a large customer base and urbanization, companies are being compelled to enhance and renovate their distribution and production platforms. Services like same-day delivery are gaining traction, propelling demand for modern distribution facilities. Also, last-mile properties are witnessing a solid increase in asset values.

However, retail REITs are not in the pink as mall traffic continues to suffer from the rapid shift in customers' shopping preference through the online channel. In fact, with ecommerce gaining market share from the traditional brick-and-mortar stores, retailers are compelled to reconsider their footprint and eventually opt for store closures in recent years, while others unable to cope with competition have been filing bankruptcies.

Particularly, amid a surge in store closures, Regional Mall REITs bore the brunt in Q1 with temporary increase in vacancies and FFO reporting an 18% decline from the prior quarter. This has also affected the overall REIT industry’s performance as excluding Regional Mall REITs, total REIT FFO would have grown 7.1% from the prior quarter, reflecting solid demand for space from other sectors.

Nevertheless, Regional Mall REITs are fighting back and improving the productivity of retail assets by grabbing attention from new and productive tenants and disposing the non-productive ones. So space refilling is taking place at higher rents as is indicated by the strong releasing spreads.

In case of hotel REITs too, an improving economy, growth in employment and a rise in wages are likely to drive demand for hotels. Particularly, improved business travel demand with lower cancellations and higher group spends, plus strong demand from the leisure division signal better prospects for hotel REITs.

Moreover, solid dividend payouts are arguably the biggest enticement for REIT shareholders. Dividend from Equity and Mortgage REITs aggregated $14.3 billion, denoting a 3.8% sequential increase. Total dividends paid were also up 7.4% from the prior-year quarter. Also, REIT valuations look attractive as with earnings growth along with mixed stock market performance have led to the lowest aggregate price-to-FFO ratio (15.8x) since 2011.

So the time is now apt to bet on some REIT stocks that have a favorable rank and solid scope for growth in a recovering economy. As a bonus point, these companies have enjoyed positive estimate revisions from analysts, reflecting their bullish sentiments.

Here are the four picks:  

Bethesda, MD-based Pebblebrook Hotel Trust (PEB - Free Report) is a hotel REIT engaged in the acquisition and investment of hotel properties mainly in upper upscale, full-service hotels situated in urban markets in major gateway cities. The stock sports a Zacks Rank #1 (Strong Buy) and has a long-term growth rate of 5%. It is a steady performer, having beaten the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat of 10.04%. Moreover, the Zacks Consensus Estimate for 2018 has been revised 3.1% upward in a month’s time.

San Francisco, CA-based Prologis, Inc. (PLD - Free Report) is a leading industrial REIT that acquires, develops, operates and manages industrial real estate space in the United States and globally. The stock has a Zacks Rank of 2 (Buy). Backed by high period-end occupancy and improving net effective rent change, the company posted a positive surprise of 8.1% in terms of funds from operations (FFO) per share.

Also, in April, Prologis announced that it has entered into a definitive agreement with DCT Industrial Trust to acquire the latter in an $8.4-billion stock-for-stock deal. The combined portfolio will enable the company to realize significant synergies and strengthen its position in key markets. Reflecting positive sentiments, the stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised 2.1% upward in a month’s time.

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

Host Hotels & Resorts, Inc. (HST - Free Report) , headquartered in Bethesda, MD, is one of the leading lodging REITs having a portfolio of luxury and upper-upscale hotels in the United States and abroad. The stock has a Zacks Rank of 2. Host Hotels came up with a positive surprise in terms of FFO per share in the latest reported quarter and results highlighted margin improvement through better productivity.

Strategic capital-recycling program and a healthy balance sheet bode well for long-term growth. Further, management expects group business demand to be strong for the rest of the year with solid group booking pace. Moreover, the stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised 3% upward in a month’s time.

Innovative Industrial Properties, Inc. (IIPR - Free Report) , headquarter in San Diego, CA, is focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for medical-use cannabis facilities. It has a Zacks Rank of 2. The stock has seen the Zacks Consensus Estimate for 2018 being revised 4.5% upward in two months’ time.

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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