3 REITs To Pick As The Fed Indicates 3 Rate Cuts In 2024

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Real estate investment trust (REIT) investors now have reasons to rejoice. Although Fed officials have held the benchmark rate steady at 5.25-5.50%, they recently indicated a three-quarter-percentage-point cut by year-end.

Specifically, the Fed officials’ median projections for the federal funds rate by the end of December 2024 have been kept unchanged at 4.6%. For 2025, the Fed now expects the interest rate to fall three-quarters of a percentage point, which is less than the one percentage point guided earlier.

With another spate of reductions in 2026, the median projection for the federal funds rate by the end of December 2026 is pegged at 3.1%, while the long-run outlook is pegged at 2.6%.

Any rate cut, even a slight one, is good news for the rate-sensitive REIT industry. This is because REITs’ dependence on debt for business keeps investors optimistic about their performances in a rate-cut environment as the companies benefit from lower borrowing costs. Moreover, low interest rates contribute to higher valuations. Also, their dividend yield grabs investors’ attention more than yields on fixed-income and money market accounts in times like these.

Apart from making this indication for three rate cuts in the current year, the Fed also revised its forecast for 2024 GDP growth, expecting it to now grow 2.1%, up from 1.4% projected earlier. The FOMC statement acknowledged that “economic activity has been expanding at a solid pace,” as suggested by recent indicators. It further noted, “Job gains have remained strong, and the unemployment rate has remained low.”

The projections for the U.S. GDP growth rate for 2025 have been upgraded to 2% from the 1.8% stated in December, and the same for 2026 has been revised upward to 2% from 1.9% guided earlier. The projection for 2024 unemployment has been revised to 4% from the 4.1% reading guided earlier.

A resilient economy obviously brings in cheers for REITs as it acts as a tailwind for leasing activity. With the REIT industry offering a real-estate structure for several economic activities, real or virtual, the sector’s prospects get a boost when the economy is going strong. This is because a healthy economy entails more economic activities and empowers people to spend more. Demand for real estate shoots up, occupancy goes up, and landlords get more power to command higher rents. Therefore, REITs’ earnings, cash flows, and dividends gain strength.

Though higher interest rates are likely to limit real estate capital market activity in the first half of the year, the same is expected to tick up once the Fed starts lowering rates as the year progresses.

Moreover, with regard to inflation, the Fed pointed out that though inflation “has eased over the past year” but still remains “elevated”. The core PCE inflation projections have now climbed slightly up to 2.6% from 2.4%, and this comes after the sticky inflation reports of recent months.

Markedly, REITs provide natural protection against inflation. Particularly, both rents and real estate values have a tendency to move north with prices increasing, thereby aiding dividend growth. A majority of leases are tied to inflation, which leads to rent increases as inflation goes up. Therefore, even amid the inflationary period, investment in the REIT industry can offer a steady stream of income.

REITs to Consider

Here, we have picked three REITs using the Zacks Screener. Apart from having robust fundamentals, these REITs have higher chances of market outperformance. Further, these REITs have been witnessing upward estimate revisions, reflecting analyst optimism.

Iron Mountain Incorporated (IRM - Free Report)

This REIT provides records & information management services, as well as data center space & solutions. Its offerings include digital transformation, data centers, secure records storage, information management, asset lifecycle management, secure destruction, and art storage and logistics. A recurring revenue business model and a well-diversified tenant base assure steady cash flows.

Iron Mountain currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the company’s 2024 FFO per share has been raised 4.5% over the past month to $4.42, which indicates an increase of 7.3% year-over-year. Moreover, the Zacks Consensus Estimate for 2025 FFO per share has been revised north 3.5% over the past month.

Host Hotels & Resorts (HST - Free Report)

This hotel REIT has a portfolio of luxury and upper-upscale hotels that is well-poised to benefit from its presence in the top U.S. markets with strong demand. Host Hotels is expected to witness a stable operating environment in 2024 due to the continuous improvement in the group business, a gradual recovery in the business segment, and steady leisure demand.

Host Hotels currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for HST’s 2024 FFO per share has been raised 1% over the past week to $1.97. Moreover, the Zacks Consensus Estimate for 2025 FFO per share has been revised north 5.2% over the past month.

Gladstone Commercial Corporation (GOOD - Free Report)

This industrial REIT focuses on the acquisition, ownership, and operation of net leased industrial and office properties across the United States. Gladstone Commercial has been witnessing active leasing, aiding solid occupancy, healthy rental collections, and ample liquidity to back its acquisitions and growth efforts.

Gladstone Commercial currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for Gladstone Commercial's 2024 FFO per share has moved 5.3% northward over the past month to $1.38. Also, for 2025, the consensus mark for FFO per share has been raised 10.1% over the past month.

Here’s how the REITs discussed above have performed in the past six months.

Zacks Investment Research

Image Source: Zacks Investment Research

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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.

Disclosure: Zacks.com ...

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