As anticipated, the Federal Reserve has cut the federal funds target rate by a quarter-point to 2-2.25% this time. However, the latest cut, which comes for the first time in more than a decade, is unlikely to rescue a sinking economy. It is rather aimed at sustaining the record long economic expansion and shield the domestic economy, which is challenged by a slowdown in global growth and trade disputes, while inflation fails to reach target levels.
In fact, in describing the current economic environment, the central bank recognized the strength of the labor market and indicated that economic activity has been rising at a “moderate” pace. With solid job gains, unemployment is hovering at low levels and household spending growth has picked up, though business-fixed investment growth has been “soft”, per the Fed’s press release post its two-day meeting.
Growth Prospects for Rate-Sensitive REITs
Obviously, the rate-sensitive REITs have an opportunity to gain, with the Fed opting for the rate cut, although as a “midcycle adjustment”. This is because dependence of REITs on debt for their business keeps investors optimistic about the companies' performance in case of a rate cut due to lower borrowing cost. Moreover, REITs are often treated as bond substitutes for their high-dividend paying nature. Particularly, government regulations mandate REITs to disburse at least 90% of their taxable income in the form of dividends to shareholders each year.
Furthermore, with the Fed’s pledge to “act as appropriate” in sustaining economic expansion, prospects of the real estate sector get a boost as growth in the economy translates into greater demand for real estate, higher occupancy levels and landlords’ greater power to demand higher rents. Because one will eventually need “real space” for economic activities and therefore, REIT’s earnings, cash flow and dividend get a boost amid economic growth.
In fact, domestic consumers are gaining confidence about the economy as indicated by the Conference Board's latest data which shows that the consumer confidence index jumped to 135.7 this July from 124.3 in June. Consumer confidence not only crushed expectations, but also hit its eight-month high, and came in a tad below its 18-year high of 137.9 achieved last October.
The strength of the labor market, undoubtedly, served as a catalyst. Low unemployment level, job gains and wage increases, together with low inflation level, lifted consumer spirit. This looks well for consumer spending in the upcoming period. With consumer spending making up more than two-thirds of U.S. GDP, it will likely continue to power the economy in the days ahead.
Encouragingly, low unemployment, increasing wages and decent consumer sentiment are also positive indicators for a number of asset categories, including retail, residential, logistics and industrial real estates. Moreover, underlying fundamentals of a number of asset categories in the REIT sector have been displaying strength. The occupancy levels of properties are hovering near the record-high marks — indicating solid demand as well as scope for generating steady revenues.
Here we have handpicked five REIT stocks that carry a favorable Zacks Rank. These stocks have been witnessing positive estimate revisions. Also, their underlying asset categories display strength.
Based in Newton, MA, Industrial Logistics Properties Trust (ILPT - Free Report) , a Zacks Rank #1 (Strong Buy) stock, is focused on the ownership and leasing of the industrial and logistics properties, primarily in the United States. The company delivered a positive surprise of 4.6% in the just-reported quarter. Healthy fundamentals of the industrial and logistics market continue to support this REIT’s performance, its projected FFO per share growth rate for the ongoing year being 6.2%. Moreover, it has a dividend yield of 6.17%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Essex Property Trust (ESS - Free Report) currently carries a Zacks Rank of 2 (Buy) and is a residential REIT based in San Mateo, CA, engaged in the acquisition, development, redevelopment and management of multi-family residential properties. Specifically, the company enjoys concentration of assets in select markets along the West Coast that is home to several innovation and technology companies. The company came up with a positive surprise of 2.15% in terms of FFO per share in the April-June quarter, backed by upbeat market conditions. Its anticipated FFO per share growth rate for this year is 5.4%.
PS Business Parks (PSB - Free Report) is into ownership, acquisition, development and operation of commercial real estate properties, especially multi-tenant industrial, flex and office space. The REIT is poised to excel as the industrial real estate market is witnessing improving fundamentals amid e-commerce boom and supply-chain strategy transformations.
PS Business Parks carries a Zacks Rank of 2, at present. The company has been a decent performer, outpacing estimates in terms of FFO per share over the preceding four quarters. It recorded a positive surprise of 4.17% in terms of FFO per share in the recently-reported quarter. Additionally, the company’s Zacks Consensus Estimate for the current year’s FFO per share moved 1.8% north to $6.83, in a month’s time.
Prologis (PLD - Free Report) is a leading industrial REIT that acquires, develops, operates and manages industrial properties in the United States and across the globe. This Zacks #2 Ranked stock generated a positive surprise of 1.32% in terms of FFO per share in the June-end quarter, aided by high occupancy. Prologis has agreed to acquire warehouse owner Industrial Property Trust, in a deal valued at about $3.99 billion, from Black Creek Group — a move that will expand the company’s position in key submarkets. Its expected FFO per share growth for 2019 is 7.9%. The trend in estimate revisions of 2019 FFO per share indicates a favorable outlook for the company and given the progress on fundamentals, there is decent upside potential to the stock.
Lamar Advertising Company (LAMR - Free Report) is one of the largest outdoor advertising companies in North America. It offers advertisers a variety of billboard, interstate logo and transit advertising formats, helping both local businesses and national brands reach out to broader audiences regularly. This Zacks #2 Ranked company’s estimated FFO per share growth rate for the current year is 6%. The stock has a forward dividend yield of around 4.74%.
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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