When a rate hike is announced by the Federal Reserve, investors in the REIT space are usually skittish because of the sector’s dependence on debt and the investment world treating them as bond substitutes for their high and consistent dividend-paying nature. There was no exception this time too and the REIT industry went into red, when the much anticipated rate hike occurred this time.
However, instead of fretting over the rate that was increased by a quarter percentage point in the recently concluded FOMC meeting and brooding too much on the indication of two more hikes later this year, we ought to shift attention to the better outlook offered by the Fed in terms of GDP growth for 2018. More good news is a positive revision in projected inflation and a slash in the Fed’s forecast for unemployment.
Such an environment can be far more rewarding for the REITs business, which usually buoys up on a stepped-up economy and job scenario. And why not? With one eventually requiring “real space” for economic activities, prospects of the real estate sector get a boost as growth in the economy and job market translates into greater demand for real estate and higher occupancy levels.
Particularly, with a recovering economy and job market gains as well as tax reforms, consumption levels are anticipated to remain elevated. And with a healthy manufacturing environment and high business inventories, demand for warehouse and logistics real estate is anticipated to be high, giving significant impetus to industrial REITs to flourish.
In fact, in recent years, companies are being compelled to enhance and renovate their distribution and production platforms to support the e-commerce business, address a large customer base and urbanization. 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.
These have helped the industrial REITs to scale new heights. 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 foot, denoting the highest level since 1989.
Lodging/Resorts REITs too are in the favorable bunch as an improving economy, growth in employment and 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 brighter prospects for these REITs.
4 Stocks to Scoop Big Gains
Here we have handpicked four REIT stocks from the above-mentioned asset categories that sport a top Zacks Rank. These stocks have been witnessing positive estimate revisions. Also, their underlying asset categories display strength with the economy and the job market showing signs of recovery. Moreover, don’t ignore the hiccups in stock prices with rate hikes, because these can provide solid entry points.
San Francisco-based Prologis Inc. (PLD - Free Report) is a leading industrial REIT engaged in the acquisition, development and operation of industrial properties in North America, Europe, and Asia. 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. Prologis has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Prologis has a long-term growth rate of 5% and the trend in current-year funds from operations (FFO) per share estimate revisions indicates a solid earnings outlook for the company. In fact, the stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised 2.4% upward in two months’ time.
Terreno Realty Corp. (TRNO - Free Report) , also based in San Francisco, is engaged in the acquisition, ownership and operation of industrial real estate in six major coastal U.S. markets — Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. The stock has a Zacks Rank of 2. Presently, its long-term expected growth rate is 10%. Further, the Zacks Consensus Estimate for 2018 FFO per share moved north by 6.7% over the past two months, signaling increased confidence of analysts in the company’s solid earnings outlook.
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 respectively 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. 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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