The U.S. economy is reflecting strength, corporate profits are up, the job market is robust with high employment and rising wages, and consumers are exhibiting confidence in their well-being. This sets the stage right for a holiday shopping bonanza that saw a prelude on Thanksgiving Day and will kick start officially with Black Friday, heating up with Cyber Monday and then of course Christmas.
Amid all the extravaganza surrounding the holiday season, investing in REIT stocks won’t be a bad proposition either as growth in the economy translates into greater demand for real estate, higher occupancy levels and landlords’ greater power to ask for higher rents.
This is also evident from the Q3 scorecard that reveals an 11.1% year-over-year improvement in funds from operations (FFO) to $16.3 billion. Same-store net operating income (NOI) increased 2.8% from a year ago, reflecting solid gains across manufactured homes, industrial, office and single-family homes sectors.
Specifically, occupancy rates for all Equity REITs reached a record-high of 94.3% in the third quarter buoyed by occupancy rates for office and industrial, which witnessed the strongest growth, gaining 170 and 58 basis points, respectively.
Demand rebounded in the office real estate market while high-consumer spending, e-commerce boom, as well as healthy manufacturing environment amid the recovering economy and job market are spurring demand for the industrial real estate category.
Well, one might say that REITs debt-dependence makes investments in them risky in a rising rate environment. But over the years, REITs have managed their balance sheets efficiently and, in the third quarter, REIT’s leverage ratios were at their lowest levels in two decades while interest expense as a percentage of net operating income came in at a record low. In fact, not only have the REITs reduced their exposure to interest rate hikes, they have opportunistically used the low-rate environment to make their financials more flexible, which is encouraging down the line for their operational efficiencies.
Moreover, even though the economy is improving, trade-related concerns, geopolitical conflicts and inflationary concerns are causing hiccups at times with a spike in volatility. But as REITs solid performance is also translating into dividend growth for its investors, with dividends paid out in the third quarter aggregating $14.3 billion, up 9.8% year over year and 0.3% sequentially, these appear great options for income investors.
Stocks to Buy
Here are the four stocks that we have handpicked for your Black Friday cart. Aside from having solid fundamentals and a decent dividend yield, these REITs hold a favorable Zacks Rank, which indicates high chances of market outperformance over the next 1-3 months. These stocks are witnessing estimate revisions too reflecting analysts’ positive view on these stocks.
New York-based Global Net Lease, Inc. GNL focuses on acquisition and management of industrial and office properties leased long term to quality corporate tenants in select markets in the United States and Europe. It sports a Zacks Rank #1 (Strong Buy) and has delivered an average positive surprise of 3.36% in terms of FFO per share. Estimate revision activities have been solid too with the Zacks Consensus Estimate for 2018 FFO per share moving up 5.8% to $2.18 over the last 30 days.
Headquartered in Uniondale, NY, Arbor Realty Trust, Inc. ABR is a REIT and direct lender that specializes in loan origination and servicing for multifamily, seniors housing, healthcare and other diverse commercial real estate assets. It has a Zacks Rank of 1. The stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised 2.6% north in a month’s time.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Pasadena, CA-based Alexandria Real Estate Equities ARE is an urban office REIT with particular focus on collaborative life science and technology campuses. It currently carries a Zacks Rank #2 (Buy) and has a long-term growth rate of 6.4%. Moreover, for 2018, the stock has seen the Zacks Consensus Estimate for FFO per share being revised marginally upward to $6.61 over the past 60 days.
Glendale, CA-based PS Business Parks Inc. PSB is into ownership, acquisition, development and operation of commercial real estate properties, especially multi-tenant industrial, flex and office space. It carries a Zacks Rank of 2. Also, for 2018, PS Business Parks’ Zacks Consensus Estimate for FFO per share has inched up 1.3% to $6.45 in the past month.
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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