REIT forecast

REIT Industry Stock Outlook – 2016

The entire year 2016 has so far favored the U. S. Real Property Investment Trust (REIT) industry. In fact, despite the actual rate hike last December, the first one since 2006, the REIT industry were able to outpace the broader market in the first five months from the current year, thanks to positive fundamentals of the underlying resource categories and cheap capital inflow.

For the year through Might 31, the total returns of the FTSE/NAREIT All REITs Catalog were 6. 5% against the 3. 6% increase logged through the S&P 500 Index. This outperformance suggests that investors are getting increasingly confident with the rate issues and expect the hike to be moderate.
Further, the June hike seems to be off the table using the latest disappointing jobs data and productivity falling to a damaging. The icing on the cake was the recent speech through Fed Chief Janet Yellen, who despite sounding upbeat about Ough. S. economic growthand cautioning investors against overreacting to lone information, failed to give any hint on the timing of the following rate hike. U. S. Treasury yields too have been declining recently.

Amid all these upheavals in the economy, the decline in Treasury yields and an anticipated extension from the low rate period, the REIT industry remains a good option, especially for income-seeking investors, for its steady and dependable money flows. And because of their high dividend paying nature, REITs tend to be treated as bonds. So REIT stock yields tend to be attractive when Treasury yields fall.
Also, demand-supply dynamics in the person asset categories and their impact on occupancy levels and pricing power from the real estate landlords play a pivotal role in selecting REIT shares.
This is because, even in this favorable rate environment, residential REIT stocks have plummeted on concerns of abundant supply within the New York and San Francisco markets. Equity Residential, which held responsible new rental apartment supply for hurting rent growth, cut the actual 2016 guidance for same store revenue on Jun 1.
Following a announcement its shares tumbled. And other residential REITs like AvalonBay Towns, Inc. (AVB – Analyst Report), Essex Property Believe in Inc. (ESS – Analyst Report) and UDR Inc. (UDR — Analyst Report) followed suit.

Dividends Still Standing Tall

Dividends are by far the biggest enticement to purchase REIT stocks. As of Apr 29, the dividend yield from the FTSE NAREIT All REITs Index was 4. 28% while the dividend yield from the FTSE NAREIT All Equity REITs Index was 3. 86%. Obviously, REITs continue to offer decent yields and outpaced the two. 18% dividend yield offered by the S&P 500 as of this date.
Note that in addition to capital appreciation, yield-hungry investors continue to possess a large appetite for REIT stocks as the U. S. law requires these to distribute 90% of their annual taxable income as dividends to shareholders. This unique feature made the REIT industry stand out and gain a solid footing in the last 15-20 years.

Capital Access

REITs have also been proactive in the capital market recently, leveraging on a low rate environment to improve their financial records. A total of $59. 29 billion in public capital grew up by stock exchange-listed REITs in 2015. This indicates investors’ confidence with this sector and their willingness to pour money into it. Additional, in 2016 through Apr 30, REITs have collected $23. four billion in capital offerings.
Moreover, reforms to the Foreign Investment in Real Property Tax Act (FIRPTA) are required to offer easy access to capital from foreign investors for publicly traded REITs and commercial property.

Zacks Industry Rank

Within the Zacks Industry classification, REITs are broadly grouped in the Finance sector (among the 16 Zacks sectors) and are further sub-divided into four industries in the expanded (aka “X”) level: REIT Equity Trust — Retail, REIT Equity Trust – Residential, REIT Equity Trust — Other and REIT Mortgage Trust. The level of sensitivity and contact with different stages of the economic cycle vary for each business.

We rank 265 industries in the 16 Zacks sectors in line with the earnings outlook and fundamental strength of the constituent companies within each industry.

We put our industries into two groups: the very best half (industries with the best average Zacks Rank) and also the bottom half (the industries with the worst average Zacks Position). Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor in excess of 2 to 1. (To learn more visit: About Zacks Business Rank. )#)

The Zacks Industry Rank is #77 for REIT Collateral Trust – Other, #105 for REIT Equity Trust – List, #159 for REIT Equity Trust – Residential, #185 for REIT Home loan Trust.

Earnings Trends

Finally, with Q1 earnings season behind all of us, it is apparent that overall growth remained stressed. The wider Finance sector, of which the REITs are part, experienced the 7. 0% decline in earnings from the same period this past year on 2. 7% higher revenues, with 59. 1% beating EPS estimations and 53. 4% coming ahead of top-line estimates.

However, within the real estate space, the trends have been different. In truth, total funds from operations (FFO) of listed Ough. S. Equity REITs succeeded in recording a 19. 5% gain in the year-ago period and 8. 3% from the prior quarter in order to $13. 2 billion, per a May-released NAREIT T-Tracker report. This was backed by solid performance across most of the asset categories. Despite the lingering issues in the real property market, this performance speaks volumes about the opportunities in the actual REIT industry.

Real Estate Fund Managers Assess the Outlook with regard to 2016

Healthy fundamentals in the REIT sector during 2015 offset concerns concerning the economy and rising interest rates, and enabled REIT returns in order to outpace the broader market. The FTSE NAREIT All REITs Index had an overall total return of 2. 3 percent for 2015, compared with 1. 4 percent for that S&P 500 Index.

REIT magazine recently spoke with the portfolio managers of a number of 2015’s top-performing real estate mutual funds to discover the possibilities and challenges they see for 2016.

REIT: What factors were you most attuned to while you invested in real estate in 2015?

Thomas Bohjalian: Our focus was on asset classes in which the supply-demand imbalance was the greatest and on companies that could still deliver above-average growth within an environment where growth is decelerating to a more moderate degree, but one that’s still above the long-term average.

Steve Buller: It was bottom-up, individually based stock picking more than anything, which did lead to some overweight positions in specific sectors for example self-storage and multifamily. To a lesser extent, it was about benefiting from some of the corporate events that occured, such as privatizations, companies selling off property, buying shares back or converting to a REIT.

Dean Frankel: All of us were looking closely at risk-taking and leverage. One of the largest factors at a thematic level that we were very centered on was the impact of technology on real estate. Another essential aspect was new index entrants, many of which represented different expense models, and we spent a lot of our time knowing their business drivers.

J. Scott Craig: For our fund, with a high-quality bias, it was a year when everything went correct. The stocks of high-quality REITs significantly outperformed in 2015, and we were overweight within the apartment sector and underweight in the hotel sector, both which worked very well. I’ve been watching for signs of late-cycle frothiness, for example properties trading above replacement cost, undisciplined supply growth and intense debt financing. I didn’t see a lot of that within 2015, but I’m starting to see some early signs to be worried about in those areas, and that’s something I’ll remain highly centered on in 2016.

Matt Richmond: We favored companies we believed were within the sweet spot of improving employment trends, most notably apartment proprietors. We also believed the strong pricing power that self-storage owners were enjoying would continue throughout every season.

REIT: How do you see the REIT market performing within 2016?

Richmond: On a relative basis, the group could still outperform other asset classes given their more durable near-term income growth, attractive dividend profile and discounted valuation levels. We begin to see the current yields on REITs as attractive and safe, with the chance of another year of dividend growth.

Bohjalian: REITs have performed better than the broader equity market in large part due to the predictable nature of the cash flows. Assuming we’re not starting a recession, which is our view, they should hold upward relatively well.

Frankel: Our outlook calls for moderate growth as well as moderate rates, and we think this is good for REITs. The actual U. S. economy is slowing right now, and investors appear worried about a recession. If the economy picks up steam in the latter the main year, we could see a nice recovery in some from the core sectors. Lower oil prices should be a tailwind, but happen to be a headwind so far. China is kind of a wild card at this time.

Craig: Commercial real estate prices may be a bit in front of themselves, and we could see some downside risk in 2016. If that occurs, the likelihood of REIT share price underperformance is also fairly high.

REIT: Is interest rate uncertainty still an issue?

Craig: The forward yield curve means that five years from now, the 10-year rate will still end up being below 3 percent. That’s a very benign backdrop for property. The pace at which the Fed increases short-term interest prices in 2016 should not be a significant driver of REITs some way, as long-term rates are much more important for REITs.

Buller: As property is a long-term asset class, the cost of long-term financing is paramount. I still think that’s going to be fairly benign, notwithstanding what the Fed does on the short end from the curve.

Richmond: We’re much more focused on the pace of economic and employment growth since the primary driver of real estate returns than we are any modest rise in rates of interest from here.

Bohjalian: With the Treasury 10-year back at two percent, maybe we can take some of the interest rate hike questions from the table. We think the Fed’s going to take a calculated approach.

Frankel: The interest rate environment feels less uncertain right now and we don’t feel that we must “defend” against rate hikes and higher long-term interest rates. It’sreally hard to assume what could cause the 10-year to move above 3 percent within the next several years.

REIT: How is the continued inflow of foreign capital impacting the investment landscape?

Frankel: Recent legislation is a big positive to market increasing foreign capital. I’d be surprised if we don’t see significant foreign inflows continuing into property.

Craig: Foreign capital continues to be highly focused on a small amount of markets, predominantly big markets on the coast. I believe there’s generally a rational relationship between asset pricing in those markets and all of those other United States, which would imply to me that foreign capital isn’t significantly distorting asset values.

Bohjalian: We continue to hear that there’s more foreign capital that wants U. S. real estate to be able to diversify the long-term income stream away from oil. Sovereign wealth funds such as the qualities of the real estate asset class. We think you will see a continued bid for high-quality real estate, particularly gateway metropolitan areas.

Richmond: There is plenty of capital seeking a home within U. S. real estate, not only because the market is relatively stable when compared with other parts of the globe, but because it presents the potential safe-haven currency trade with income growth.

Buller: It it’s still positive. Recent changes in the Foreign Investment in Real Property Tax Act (FIRPTA) may have a short-, medium- and longer-term impact on capital flows from foreign entities. At the same time, slightly less will originate from the sovereign wealth funds of oil-producing nations, which have been large purchasers, so there is some offsetting in that.