Dependence of REITs on debt for their business makes investors wary of their performance in a rising rate environment. Also, the investment world's treating them as bond substitutes for their high and consistent dividend-paying nature makes them susceptible to rising rates. This is why their price performance tends to fluctuate when the Federal Reserve is optimistic about rate hikes.

Chairman Jerome Powell opened his innings with a 0.25% interest rate hike yesterday but this time we should perhaps think twice before looking at the REIT space with a skeptic’s eye. Over the years, REITs have managed their balance sheets efficiently and are now well prepared for a rising rate environment. In fact, instead of looking for debt to finance their portfolio, these have strategically resorted to equity capital in recent years.

This helped the balance sheets of the overall REIT industry to become less leveraged in decades. Per the Nareit T-Tracker, the ratio of debt-to-book assets came at 47.6% in fourth-quarter 2017, denoting a 95 basis-point decline over the past year while market leverage ratio is hovering around its record low achieved in 2016. Moreover, interest expense as a share of Net Operating Income (NOI) of 22.3% in the fourth quarter came close to its record low of 21.7% and well below 38% before the financial crisis.

Not only have the REITs reduced their exposure to interest rate hikes, they have opportunistically used the low-rate environment to make their financials more flexible, which is encouraging down the line for their operational efficiencies. REITs have made borrowings at a fixed rate and extended the average maturity of their debt outstanding to more than six years, thereby locking the low rates for an elongated period.

And finally, along with the much anticipated quarter-point rate hike this time, the GDP forecast for 2018 was raised to 2.7% from 2.5% in December while the same for 2019 has been revised north to 2.4% from 2.1%. Moreover, in a post-meeting statement, the committee said that the "economic outlook has strengthened in recent months."

This, in turn, drives the prospects of the real estate sector because growth in the economy translates into greater demand for real estate, higher occupancy levels, and landlord’s greater power to ask for higher rents. Because one will eventually need “real space” for economic activities and therefore, a REIT’s earnings, cash flow, and dividend get a boost as rate increases amid economic growth.

Now, if the rise in construction activity and the lengthy current real estate cycle point at a late stage of the cycle, then one needs to consider the vacancy rates. This is because, vacancy rates are either stable or hovering near lows for majority of the asset categories, suggesting that the industry is not overbuilt yet and that rather supply is in sync with demand.

4 Stocks to Scoop Up Big Gains

Here we handpicked four REIT stocks that sport a favorable Zacks Rank. These stocks have been witnessing positive estimate revisions. Also, their underlying asset categories display strength with the economy and the job market showing signs of recovery. Moreover, don’t ignore the hiccups in stock prices with rate hikes, because these can provide solid entry points.

New York-based W. P. Carey Inc. (WPC - Free Report) is a REIT engaged in providing long-term sale-leaseback and build-to-suit financing for companies in the United States and Europe. It has a Zacks Rank #1 (Strong Buy) and a dividend yield of 6.56%. It is also a steady performer, having exceeded the Zacks Consensus Estimate in each of the four trailing quarters with an average beat of 16.4%.

The stock is also experiencing positive estimate revisions with the Zacks Consensus Estimate for 2018 funds from operations (FFO) per share being revised 6.6% upward in a month’s time. Meanwhile, the stock has gained 1.5% over the past month compared with the industry’s descend of 0.2%. It is a hot pick with a Momentum Score of A.

Headquartered in Salt Lake City, UT, Extra Space Storage Inc. (EXR - Free Report) is a notable name in the self-storage industry. This REIT offers an array of well-located storage units to its customers, including boat storage, recreational vehicle storage, and business storage. It is the second largest self-storage operator in the United States and the largest self-storage management company in the nation. Extra Space has a Zacks Rank #2 (Buy). It has a long-term growth rate of 5.7%.

The stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised 2% upward in a month’s time. Even with a number rate hikes in the past year, the stock has surged 12.8% compared with the industry’s descend of 6.1% and is highly coveted with a Momentum Score of A.

Arbor Realty Trust, Inc. (ABR - Free Report), headquartered in Uniondale, NY, is a national direct lender that specializes in loan origination and servicing for multifamily, seniors housing, healthcare and other diverse commercial real estate assets. It has a Zacks Rank of 2 and an attractive dividend yield of 9.5%.

The stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised 2.3% north in a month’s time. Over the past month, the stock has gained 4.4%, against the industry’s descend of 0.2%.

Williamsburg, VA-based Sotherly Hotels Inc. (SOHO - Free Report) is engaged in the acquisition, renovation, upbranding, and repositioning of upscale to upper-upscale full-service hotels in Southern United States. It has a Zacks Rank of 2 and a dividend yield of 7.3%.

The stock is a solid pick with a Value Score of A. It has seen the Zacks Consensus Estimate for 2018 FFO per share being revised 1.9% north in a month’s time. Also, over the past month, the stock has appreciated 2.8% compared with the industry’s descend of 0.2%.

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.