REITs managed to pull off a decent performance in 2019. The FTSE NAREIT All REIT Index gained 27.12% since the beginning of the year through Dec 27. Obviously, the Fed’s three interest rate cuts this year, following the hike in 2018, brought good news to REIT stocks. Moreover, with individual market dynamics playing a crucial role in determining REITs’ performance, favorable conditions of the underlying asset category helped a number of REITs to excel.
Further, with resilient economic activity, healthy job-market environment, low interest rates and solid property fundamentals coupled with the diversification benefits that real estates offer, 2020 is likely to be a good year for REITs.
Particularly, with growing e-commerce penetration and companies making immense efforts to improve supply-chain efficiencies, the demand for logistics infrastructure and efficient distribution networks is likely to continue, and support fundamentals of the industrial and logistics market.
Per a report by CBRE Group CBRE, rent growth is projected at 5% for 2020, and is likely to be driven by newer products and infill industrial space in supply-constrained markets. High consumer spending will likely help offset any impact from tariffs, and provide support to the industrial and logistics market. In fact, lingering trade concerns will likely result in increased focus on outsourcing. This in turn will drive growth of the third-party logistics (3PL) sector and boost its leasing activity.
Although high deliveries, and new and potential rent-control legislation will remain concerning for the industry, demand for residential REITs is expected to remain strong in 2020. Household formation remains good, which will likely support the industry’s growth. While millennials will continue to move into homeownership, affordability issues will likely affect the pace. In fact, as high home-ownership costs in several markets are likely to hinder the transition from renter to homeowner, the demand for rental housing units is likely to be decent. Moreover, due to limited construction activity, retail REITs are expected to witness rent growth in 2020, with a focus on service and experiential tenants, and omni-channel players.
Further, specialty sectors — including self-storage, data centers, medical office, life sciences facilities and seniors housing — have made headlines in recent years and investments in these alternative asset classes have been rising steadily. Per a report by CBRE Group, alternatives investment volume averaged $59 billion annually since 2014, denoting 12% of all commercial real estate investment, up from 6% at the peak of the prior cycle. These asset categories are likely to enjoy favorable demand in 2020 as well amid structural changes in business, technological advancements and favorable demographics.
Moreover, REITs have reduced their exposure to rate hikes and used the low-rate environment to make their financials more flexible, which is encouraging down the line for operational efficiencies. Commercial real estate in the United States is likely to be alluring for investors in the coming year on the above-mentioned factors along with global uncertainty and slowdown as well as the presidential election.
Stock Picks
Here we have picked five REITs, using the Zacks Screener. Apart from having robust fundamentals, these REITs have higher chances of market outperformance. Further, these stocks are witnessing estimate revisions, reflecting analysts’ optimism.
Wyomissing, PA-based Gaming and Leisure Properties, Inc. GLPI is engaged in acquiring, financing and owning real estate property to be leased to gaming operators in triple-net lease arrangements. Gaming and Leisure Properties currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its funds from operations (FFO) per share was revised 0.6% north for both 2019 and 2020 in two months.
Duke Realty Corporation DRE currently carries a Zacks Rank #2 (Buy). 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 that have solid growth potential. The Zacks Consensus Estimate for its 2019 and 2020 FFO per share has been revised 0.7% and 1.3% upward, respectively, in two months, indicating a favorable outlook. The FFO per share estimate also indicates a year-over-year increase of 8.3% and 5.4%, respectively.
EastGroup Properties, Inc. EGP, a Ridgeland, MS-based REIT, is focused on developing, acquiring and operating of industrial properties throughout the key Sunbelt markets in the United States. The company focuses more on states like Florida, Texas, Arizona, California and North Carolina. It currently carries a Zacks Rank of 2. Over the past two months, the Zacks Consensus Estimate for its FFO per share for 2019 and 2020 witnessed upward revisions to $4.96 and $5.27, respectively, indicating year-over-year growth of 6.2% and 6.4%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Located in Buffalo, NY, Life Storage, Inc. LSI is a self-administered and self-managed equity REIT that acquires and manages self-storage facilities. Notably, the self-storage asset category is need-based and recession-resilient. Additionally, the self-storage industry is likely to continue experiencing solid demand, backed by favorable demographic changes. The company currently carries a Zacks Rank #2. The consensus estimate for its 2020 FFO per share has moved up nearly 1% to $6.00 over the past month, indicating an increase of 6.8% from the year-ago reported figure.
Chicago, IL-based residential REIT Equity Residential EQR is focused on the acquisition, development and management of high-quality apartment properties in top U.S. growth markets. Job-market growth, favorable demographics, lifestyle transformation, and creation of households bode well for the company. It currently has a Zacks Rank #2. The consensus estimate for its 2020 FFO per share moved 0.6% north over the last 60 days, suggesting 4.3% year-over-year rise.
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.
Zacks Top 10 Stocks for 2020
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