As anticipated, this time the Federal Reserve kept interest rates unchanged at the end of its two-day policy meeting in the 1.5-1.75% target range. Further, the “dot plot” of individual member’s projection for the future suggests lesser chances of any rate hike or cut in 2020.
The move comes after the benchmark rate was slashed thrice this year, in a bid to shield the economy amid global economic slowdown, recession fears and the long-standing U.S.-Sino trade war.
Obviously, the Fed’s neutral stance does not provide enough impetus to the rate-sensitive REIT sector, as compared with a rate cut. This is because of REITs’ historical dependence on debt for their business as well as for often being treated as bond substitutes for their high-dividend paying nature.
However, instead of fretting over the central bank’s neutral stance, we ought to shift attention to the slew of favorable economic data ruling the headlines, of late. This includes the latest numbers from the Labor Department, indicating a robust job market with increase in non-farm payrolls and fall in unemployment rate in November. Moreover, consumer sentiment remains high and spending continues to be resilient. The economy, currently in its record 11th year of expansion, is still reporting growth, though at a sluggish pace, and consumers are anticipated to keep the momentum going.
For REITs, this can be far more rewarding because its business usually buoys up on a stepped-up economy and job scenario. And with individual market dynamics playing a critical role in determining REITs’ performance, favorable conditions only pump up chances of further growth.
This draws our attention to the industrial real estate category that has retuned more than 48% so far in the year and posted continued strong increases in funds from operations (FFO) even in the third quarter. The asset category is further poised to excel in 2020, backed by robust fundamentals.
Fundamentals to Remain Strong
In fact, in a rising e-commerce market, the industrial real estate asset category continues to play a pivotal role, transforming the way how consumers shop and receive their goods. Services like same-day delivery are gaining traction and last-mile properties in high-income urban areas are witnessing solid pricing, occupancy and growth in rentals. Furthermore, demand for distribution space has been rising, as e-commerce continues to expand to sectors like grocery and furniture.
Also, apart from e-retail, companies are making immense efforts to improve their supply-chain efficiencies, propelling demand for logistics infrastructure and efficient distribution networks, in turn, enabling industrial landlords to enjoy a favorable market environment.
Per a report from CBRE group CBRE, rent growth is projected at 5% in 2020, and will be driven by newer product and infill industrial space in supply-constrained markets. There is likely to be acceleration in demand for light-industrial warehouses of less than 120,000 square feet, with e-commerce companies competing on the same-day delivery service to customers. And with space being much limited in the smaller-size section, growth in rent is projected to continue in the next year.
There is also an uptick in renewal rates and this trend is expected to continue in markets with low vacancy rates. If trade conflicts have made you skeptical, then it’s apt to think again. Because lingering trade concerns will likely result in more focus on outsourcing and this, in turn, will result in growth in the third-party logistics (3PL) sector and drive its leasing activity.
Given the factors discussed above, we believe it is an appropriate time to invest in some fundamentally-strong industrial REIT stocks. We have handpicked four stocks using our Zacks Screener and aside from having solid fundamentals, these better-ranked REITs have high chances of market outperformance over the next 1-3 months. These stocks are witnessing positive estimate revisions too, reflecting analysts’ upbeat view.
Prologis, Inc. PLD sports a Zacks Rank #1 (Strong Buy), at the moment. This San Francisco, CA-based industrial REIT is well poised to grow in the days ahead. With its balance-sheet strength and prudent financial management, this market leader has been actively banking on its growth opportunities through acquisitions and developments. This stock is also witnessing positive FFO per share estimate revisions, reflecting investors’ bullish view on the stock. In fact, the Zacks Consensus Estimate for 2019 and 2020 FFO per share has been revised upward 1.2% and 4.6%, respectively, in two months’ time.
Duke Realty Corporation DRE carries a Zacks Rank #2 (Buy), currently. This Indianapolis, IN-based leading domestic pure-play industrial REIT focuses on building a superior portfolio of industrial properties through acquisitions and development, on a speculative and build-to-suit basis, in high-barrier markets with solid growth potential. The stock has witnessed positive estimate revisions in terms of FFO per share over the past month. The current-year FFO per share estimate also indicates a projected increase of 8.3%, year on year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
First Industrial Realty Trust, Inc. FR, a Chicago, IL-based industrial landlord focuses on management, lease, acquisition, (re)development, and selling of bulk and regional distribution centers, light industrial, and other industrial facility types across major markets in the United States. It currently carries a Zacks Rank of 2 and has a long-term growth rate of 6.4%, ahead of the industry average of 5.2%. Moreover, both for 2019 and 2020, the stock has seen the Zacks Consensus Estimate for FFO per share being revised marginally upward to $1.74 and $1.83, respectively, over the past month.
EastGroup Properties, Inc. EGP, a Ridgeland, MS-based REIT, is focused on developing, acquiring and operating of industrial properties in key Sunbelt markets throughout the United States. The company particularly gives weightage to states like Florida, Texas, Arizona, California and North Carolina. It currently carries a Zacks Rank of 2. Over the past month, the Zacks Consensus Estimate for FFO per share for 2019 and 2020 witnessed northward revisions to $4.96 and $5.27, respectively, indicating year-over-year growth of 6.2% and 6.4%.
Here’s how the above stocks have performed in the year so far.
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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