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REITs Outperform Broader Market in May: Bet on 4 Solid Picks

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A solid jobs report for the month of May has triggered chances of a rate hike this month by the Federal Reserve. However, investors in the REIT space can shrug off such issues. This is because even though REITs have traditionally depended on debt for their business and were considered as bond substitutes for the high and consistent dividend-paying nature making their short-term returns susceptible to rate moves, this time around, these companies seem to be better poised to brave the rising rate environment.

In fact, over the years, REITs have shored up capital and made concerted efforts to reduce leverage. These have resorted to equity capital rather than brooding too much on debt capital to finance their portfolio and carry on their business. Moreover, the healthy economy serves as a positive catalyst for demand for many of the asset categories.

Also, the returns for May indicate the abating of the rate hike concerns. In fact, REITs delivered an encouraging performance in the month, as well as outperformed the broader market in the month. Per the data from REIT.com, total returns of the FTSE Nareit All REITs Index logged in a gain of 3.5% in the month, while the S&P 500 rose 2.4%.

Lodging REITs ruled the market in May, with returns from this sector shooting up to 11.9%. Obviously, the news of Blackstone Group LP’s plan to acquire LaSalle Hotel Properties (LHO - Free Report) , in a $4.8-billion all-cash deal, served as a tailwind and pulled in the attention of investors to this sector. Also, healthcare REITs gained 7.5%, while freestanding retail REIT reported 6.7% increase in returns, as earnings were comparatively better than what was apprehended.

Notably, after lackluster performance in the first two months of 2018, the U.S. REIT industry has been gaining solid ground. Returns rebounded in March and were in the positive territory in April as well. In fact, the mojo seems to be back in the market, following the steady performance of REITs in Q1.

Per the latest NAREIT media release, the Q1 scorecard revealed 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, but witnessed a marginal sequential slip.

Admittedly, high consumer confidence in an improving economy and job market gains have been fueling consumption levels. In fact, with one eventually requiring “real space” for economic activities, prospects of the real estate sector are getting a boost as growth in the economy translates into greater demand for real estate and higher occupancy levels.

Further, valuation wise, several REIT stocks seem attractive, while encouraging performance by a number of REITs in Q1, as well as an increase in merger and acquisition activities in the industry, point at the prevailing favorable environment and re-instill confidence.

Thus, the time is now apt to bet on some REIT stocks that have a favorable rank and solid scopes 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 carries a Zacks Rank #2 (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 4.3% upward in two months’ 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 across the globe. The stock has a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Backed by high period-end occupancy and improving net effective rent change, the company posted a positive surprise of 8.1% in terms of FFO per share.

Also, in April, Prologis announced that it has entered into a definitive agreement with DCT Industrial Trust (DCT - Free Report) 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 2.4% upward in two months’ time.

West Palm Beach, FL-based Chatham Lodging Trust (CLDT - Free Report) is focused mainly on investing in premium-branded upscale extended-stay and select-service hotels. It has a Zacks Rank of 2. The stock has seen the Zacks Consensus Estimate for 2018 and 2019 being revised 1% and 2.6% upward in the past two months.

Host Hotels & Resorts, Inc. (HST - Free Report) , headquartered at 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 recently-reported quarter. The company’s 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 over the past two months.


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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