Forget A Rate Hike, REITs Thrive Throughout Earnings Season

If anticipations of a March rate hike amid the hawkish comments of several Fed officials have made investors in the REIT space jittery, then this is the right time to think again. This is because the fourth-quarter 2016 performance of REITs highlights strength and stability amid an improving economy. According to a NAREIT Media release, occupancy rates touched record level, while funds from operations (FFO) reported growth.

Per an earnings scorecard, initiated by the NAREIT, for comparing the operating performance of the Equity REITs, which constitute around 95% of the S&P 500 Real Estate Sector’s equity market capitalization, with that of the ten other sectors, the real estate industry has delivered the second highest earnings growth among the S&P 500 headline sectors.

In fact, earnings for REITs in the newly created Real Estate sector, which is gauged in terms of FFO per share, climbed 13.8% year over year in fourth-quarter 2016 against the 9.9% growth in earnings per share for the market cap-weighted S&P 500.

Particularly, the S&P 500 REIT constituents like Simon Property Group, Inc. (SPG - Free Report) , Boston Properties, Inc. (BXP - Free Report) , Host Hotels & Resorts, Inc. (HST - Free Report) and Public Storage (PSA - Free Report) delivered better-than-expected results in the quarter, with positive surprises of 15.94%, 2.67%, 7.89% and 0.76%, respectively, in terms of FFO per share.

Admittedly, an improving economy acted as the tailwind in the fourth quarter. A progressing economy leads to higher economic activity, rise in jobs, increased consumer confidence and thus greater purchasing power. This, in turn, leads to a rise in demand for space. Also, location of properties played a crucial role in determining performance of the REITs.

Further, the fourth-quarter 2016 FFO of listed U.S. Equity REITs delivered a gain of 7.4% from the prior quarter, and 20.5% from the comparable period last year. Fundamentals of the real estate sector remained robust, with occupancy rates of all REIT-owned properties reaching a record high of 94.5%, denoting an expansion of 81 basis points (bps) sequentially, and 123 bps year over year. In addition, same store net operating income (NOI) climbed 3.6% from last year and was in line with the third-quarter growth.

Though rising supply in certain categories, including the residential real estate space, raise our concerns; supply issues are manageable in most asset classes, and the REITs seemed to have room for growth.

After all, one cannot go back to the primitive era and live, work and dine under the sun and the moon everyday or fast forward to year 3000 and live in virtual space! So demand for real estate would always be there.

Currently, Simon Property, Host Hotels, Public Storage and Boston Properties carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note: Funds from operations (“FFO”), a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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