Forget The Fed, Buy These 5 REITs Ahead Of Q3 Earnings
Zacks Investment Research | Oct 12, 2017 06:57AM ET
The Minutes from the September Federal Open Market Committee meeting, which clearly signal a December rate hike, might keep investors in the REIT space worried. The Fed’s anticipation that the factors leading to a slowdown in inflation will eventually subside further enhances the chances of a rate hike.
However, it won’t be prudent to brood too much on a rate hike. Rather, the focus should be on the expected Q3 financial results of REITs based on the fundamentals of asset categories to which they cater to. Here, we will tell you why:
Forget Fed Moves
No doubt, for REITs, which depend on debt for their business and pay high and consistent dividend, a higher rate affects the present value of future cash flows. Therefore, asset valuation, including bond coupons and stock dividends, experiences a decline. But a rise in rates also lugs along scope for increasing future cash flows.
In fact, any decision by the Fed to increase rate mirrors growth in the domestic economy and the central bank’s confidence in the recovery. When economic growth picks up and inflation rises, prices of real estate generally increase. Consequently, rent and occupancy of properties go up. As such, REIT’s earnings, cash flow and dividend get a boost.
Focus on Underlying Asset Strengths
In fact, with the economy and the job market showing signs of recovery, a number of asset categories displayed strength in third-quarter 2017. Take for example the industrial asset category that has grabbed attention on the back of robust demand, recovering economy and job market, strengthening e-commerce market and healthy manufacturing environment.
Moreover, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, data center REITs are experiencing a boom market. In fact, demand has been outpacing supply in top tier data center markets. Despite enjoying high occupancy, these markets are absorbing new construction at a faster pace.
Going by numbers, per a Zacks Investment Research
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