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Bet on These 4 Top Picks as REITs Outdo Broader Market in Q1

Moumita Chattopadhyay
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Investors’ decision to pour their hard-earned money into REITs based on underlying asset market fundamentals and the rate environment seems well thought out. This is because REITs outperformed the broader stock market not only in March but also in the first quarter of this year. In fact, total returns of the FTSE Nareit All REITs Index grew 4.22% in March and 16.7% in the first quarter, while the S&P 500 inched up 1.94% in the month and 13.65% in the quarter, per data from REIT.com.

This stellar performance was backed by solid gains experienced across majority of the sectors. And the movements in 10-year Treasury yield ended up playing a major role in this recovery. (Read more: 4 REIT Stocks to Add as U.S. Treasury Yields Remain Volatile)

Sectors That Excelled

Majority of equity REIT property segments registered double-digit total returns in the Jan-Mar quarter and encouragingly, eight of those categories posted returns higher than the FTSE Nareit All Equity REITs Index’s return.

Particularly, Infrastructure REITs recorded a splendid quarter, with returns bumping up 21.35%. This segment mainly comprises cell-tower REITs. The Industrial REITs were close behind, with the sector posting 21.28% in total returns. This sector, which comprises mainly logistical facilities, serves as a critical component for the e-commerce business and with high consumer spending, e-retail boom and a healthy manufacturing environment, demand for distribution facilities are on the rise. 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 while temperature-controlled warehouses are gaining traction.

Among other decent-performing sectors, timber REITs posted 21.11% in total return, office sector was up 20.31%, while data centers’ total return climbed 20.16%. Admittedly, e-commerce is driving demand for data center and cell-tower REITs as these offer the critical infrastructure for the e-retail value chain. Furthermore, with solid growth projections for the markets of artificial intelligence, Internet of Things, autonomous vehicle and virtual/augmented reality, demand for data-center and cell-tower spaces will likely remain robust. The deployment of 5G network will fuel growth of tower and fiber business as wireless carriers look to expand and enhance their networks.

Meanwhile, though retail REITs have been fighting odds like store closures and bankruptcies, the companies are making a comeback by improving productivity of retail assets through attracting new and productive tenants and discarding low-yielding ones. This sector too registered 14.4% in total returns in the recently-concluded quarter.

Our Take

Moreover, the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders and therefore, yield-hungry investors have a large appetite for such stocks. As of Mar 31, 2019, the dividend yield of the FTSE Nareit All REITs Index was 4.13%. The yield of the FTSE NAREIT All Equity REITs Index was 3.72%, while the FTSE NAREIT Mortgage REITs Index yielded 10.61%. Clearly, the REITs continued to offer solid yields and outpaced the 2% dividend yield offered by the S&P 500 as of that date.

In addition, occupancy levels of properties are hovering near the record-high marks, indicating strong demand and scope for generating steady revenues. Equity REITs have also maintained low leverage, with a debt ratio of 32.3%. This apart, accessibility to capital is also a prime factor in the REIT industry and in the Mar-end quarter, publicly-listed REITs were able to raise $19.6 billion in 57 equity and debt offerings, up from $15.8 billion in 37 equity and debt offerings in the comparable period last year.

Also, lately, with the Fed’s recent dovish stance, adding some REIT stocks with a favorable rank and room for solid growth in the future seems a prudent one.

Here are the four picks:  

Plymouth Industrial REIT, Inc. PLYM, based in Boston, MA, focuses on the acquisition and management of single and multi-tenant industrial properties. The company targets properties in the secondary and select primary markets across the United States. This Zacks Rank #1 (Strong Buy) stock has seen the Zacks Consensus Estimate for 2019 funds from operations (FFO) per share being revised 25.1% upward over the past 30 days to $2.59, reflecting analysts’ optimism in the stock. The stock has gained 18.2%, in the past three months.

Crown Castle International Corp. CCI, based in Houston, TX, is engaged in ownership, operation and leasing of more than 40,000 cell towers and around 65,000 route miles of fiber supporting small cells and fiber solutions. This infrastructure is geographically dispersed throughout the United States. This Zacks Rank #2 (Buy) player’s expected FFO per share growth for the current year is 7.3%. Moreover, it has a long-term growth rate of 15.5% and the stock has appreciated 22.4%, over the past three months.

Digital Realty Trust, Inc. DLR is a San Francisco, CA-based data-center REIT that supports the data center, colocation and interconnection strategies of several firms across its secure, network-rich portfolio of data centers positioned in North America, Europe, Asia and Australia. This Zacks #2 Ranked stock has a long-term growth rate of 7% and the Zacks Consensus Estimate for 2019’s FFO per share has moved north marginally in 30 days’ time. The stock has climbed 14.6% in 90 days’ time.

Based in Newton, MA, Industrial Logistics Properties Trust ILPT, another Zacks Rank #2 stock, is focused on the ownership and leasing of the industrial and logistics properties, primarily in the United States. The company’s projected FFO per share growth for the ongoing year is 7.4%. The Zacks Consensus Estimate for the same moved up 3.6%, over the past 60 days. The stock has rallied 9.9%, over the past three months.

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

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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