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Solid Fundamentals Help REITs Outdo Market: 4 Picks

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Investors’ decision to pour their hard-earned money into REITs based on underlying asset market fundamentals rather than brooding over the rate hike seems well thought out.

This is because REITs have outperformed the broader stock market for four straight months. In fact, total returns of the FTSE Nareit All REITs Index grew 4.1% in June while the S&P 500 inched up 0.6%, per data from REIT.com.

Sectors That Excelled

Shopping-center REITs recorded a stellar month, with returns bumping up 8.3%. Among the other decent-performing core, self-storage and data center REITs gained 7.03% and 6.68%. Industrial REITs posted growth of 2.65%.

Meanwhile, though retail REITs have been fighting odds like store closures and bankruptcies, they are making a comeback by improving productivity of retail assets through attracting new and productive tenants and discarding low-yielding ones. These turnaround efforts are well reflected in the returns.


Industrial REIT Has Room for Growth

Fundamentals of asset categories are likely to continue to play a pivotal role in determining REIT returns and one sector that is positioned to excel is industrial REIT. This sector has logged a gain of 5.65% in the first six months of 2018, with enough room for decent gains in the days ahead as well.

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 value.

Meanwhile, taking a recovering economy and healthy job market scenario as well as tax reforms into consideration, consumption levels are expected to remain elevated. And a healthy manufacturing environment and high business inventories are likely to drive demand for warehouse and logistics real estate, providing significant impetus to industrial REITs in the form of rent escalation apart from high occupancy.

Thus, it is the right time to bet on some REIT stocks that have a favorable rank and solid scope for growth. As a bonus, these companies have seen positive estimate revision from analysts.

Here are the four picks:  

San Francisco, CA-based Terreno Realty Corporation (TRNO - Free Report) is an industrial REIT 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, DC. The stock sports a Zacks Rank #1 (Strong Buy) and has a long-term growth rate of 10%. Moreover, the Zacks Consensus Estimate for current-year funds from operations (FFO) per share has been revised 4.1% upward over the last 60 days. The stock has gained 9.9% in the past six months.

Duke Realty Corporation (DRE - Free Report) is engaged in owning, managing and developing industrial properties across the nation. It has a Zacks Rank of 2 (Buy). The consensus mark for FFO per share for this Indianapolis, IN-based industrial REIT has moved 2.4% higher for the current year over the last 90 days. The stock has appreciated 9.9% over the past six months.

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

Glendale, CA-based PS Business Parks Inc. (PSB - Free Report) is into ownership, acquisition, development and operation of commercial real estate properties, especially multi-tenant industrial, flex and office assets. It has a Zacks Rank #2. Return on equity (ROE) is 18.6% compared with the industry average of 5%. Further, the consensus FFO per share estimate for the current year has moved 1.4% up over the last 60 days. In the past six months, the stock has climbed 8.1%.

EastGroup Properties, Inc. (EGP - Free Report) , headquartered in Ridgeland, MS, is focused on the development, acquisition and operation of industrial properties in major Sunbelt markets throughout the United States. It has a Zacks Rank of 2 and a long-term growth rate of 5.2%. The stock has seen the Zacks Consensus Estimate for 2018 being revised 1.1% upward in three months’ time. The stock has appreciated 11.5% over the past six 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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