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Why REIT Valuations Look Attractive as the Market Hits the Roof

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May. 30 2018, Published 12:21 p.m. ET

First-quarter earnings expectations

In the recently concluded first quarter, more than 95% of REITs reported earnings beats and maintained their guidances for 2018. Retail sector REITs, which were battered in 2017, have now stabilized, and industrial (LXP) and hotel (PEB) REITs beat expectations in the first quarter. The laggards in the first-quarter earnings season were the REITs investing in student housing, cell towers (AMT), and apartments (APT).

Strong earnings have led to a rebound in REITs, which faltered in 2017 due to earnings misses and downward forward guidance.

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Strong fundamentals driving the sector

Real estate fundamentals have started showing signs of improvement after a being subdued through late 2016 and 2017. There are still concerns about excess inventory, but slowing construction activity due to higher input costs and interest rates is likely to cool supply, and positive demand growth resulting from rising incomes and low unemployment could help balance the sector (VNQ). Close to 60% of REITs reported higher-than-expected FFO (funds from operations) in the quarter, and just 7% of REITs reported lower FFO.

Valuations look attractive

As per Calvin Schnure, the senior vice president of research and economic analysis at Nareit (National Association of Real Estate Investment Trusts), “The forward momentum in earnings growth contrasted with REITs’ mixed stock market performance, resulting in the lowest aggregate price to FFO ratio since 2011. At a time when price-earnings multiples for broad stock market indices have risen to post-crisis highs, REIT valuations remain attractive.”

Updated valuations, especially after the sector’s first-quarter earnings and its correction since the beginning of 2018, could be a bonus for the sector. In the next article, we’ll discuss the implications of the rollback of Dodd-Frank Act regulations on the real estate sector.

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