4 REITs to Pick as Fed Lowers Rate and Signals Additional Cuts Ahead
Moumita C. Chattopadhyay
7 min read
Real estate investment trust (REIT) investors now have reasons to rejoice because the Fed officials have announced a 50-basis point (bps) cut to the federal funds rate to a range of 4.75%-5%. This comes amid indications of a moderation in inflation and a softening of the labor market. It marks the first downward move in four and a half years and comes to avert a labor market slowdown.
The Fed’s new dot-plot also indicates another 50 bps cut by the end of this year, another full percentage point reduction by the end of 2025 and half a percentage point decline in 2026.
The FOMC statement acknowledged that “economic activity has continued to expand at a solid pace”, as suggested by recent indicators. However, it noted that “Job gains have slowed, and the unemployment rate has moved up but remains low.”
Fed has now revised its forecast for 2024 GDP growth, expecting it to now grow 2.0%, slightly down from 2.1% projected earlier, but reaffirmed its projections at 2% for 2025 and 2026. However, the projection for 2024 unemployment has been revised to 4.4% from 4% guided earlier.
REITs Grab Headlines When Fed Cuts Rates
Any rate cut, even a slight one, is good news for the rate-sensitive REIT industry. This sector is capital intensive, and its dependence on debt for business keeps investors optimistic about their performances in a rate-cut environment as the companies benefit from lower borrowing costs. 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.
Over the years, REITs have improved their balance sheet strength and are well-poised to capitalize during both the ups and downs of the cycle. Per the latest data from the Nareit Total REIT Industry Tracker Series (T-Tracker) report, among total debt, the majority was unsecured at 79.2%, and 90.8% of the total debt was fixed rate. Also, leverage ratios were low, with debt-to-market assets at 34.1%, and the weighted average term to maturity of REIT debt was 6.5 years.
What Lies Ahead for REITs?
A resilient economy brings in more 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 remain correlated to the health of the economy. A resilient or 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. REITs’ earnings, cash flows and dividends gain strength.
In the current macroeconomic environment, this means that the best set-up for REITs would be the one where rates are falling, and the economy makes a soft landing. This would imply lower financing costs while still maintaining solid cash flows from properties.
The inflationary period and high interest rates have impacted growth expectations, posing challenges for REITs and causing investors to retreat. However, the outlook for this asset class appears promising.
In the short term, the market will remain focused on potential rate cuts and economic data, prompting a reevaluation of REIT investments. However, in the medium to long term, REITs are likely to become a more attractive choice as rates decrease. Lower rates lead to reduced refinancing costs, which should drive higher expected earnings growth than previously anticipated and dividend increases.
A favorable cost of debt and equity will position REITs to capitalize on buying opportunities and expand externally. Over the years, REITs have strengthened their balance sheets, which will support their growth endeavors. Furthermore, limited construction activity in certain sectors due to high interest rates is expected to keep supply in check during 2026 and 2027, enhancing the fundamentals of the REIT sector.
Stocks to Consider
Here, we have picked four REITs using the Zacks Screener. Apart from having robust fundamentals, these REITs have higher chances of market outperformance. These stocks have been witnessing upward estimate revisions, reflecting analyst optimism.
Essex Property Trust ESS: This residential REIT, which has a robust property base in the West Coast market, is poised to benefit from the healthy demand for its residential units. The West Coast is home to several innovation and technology companies that drive job creation and income growth. The West Coast region has higher median household incomes, an increased percentage of renters than owners and favorable demographics.
With layoffs in the tech industry slowing and return to office gaining momentum, the West Coast markets are likely to see an increase in renter demand in the near term. Due to the high cost of homeownership, the transition from renter to homeowner is difficult in its markets, making renting apartment units a more flexible and viable option.
Essex Property is also banking on its technology, scale and organizational capabilities to drive margin expansion across its portfolio and bring about operational efficiency by lowering costs. Essex Property maintains a healthy balance sheet and enjoys financial flexibility.
ESS currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the company’s 2024 FFO per share has been raised marginally over the past week to $15.55, which indicates an increase of 3.5% year over year. Moreover, the Zacks Consensus Estimate for 2025 FFO per share has been revised north 1% over the past month. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Essex Property Trust, Inc. Price, Consensus and EPS Surprise
Essex Property Trust, Inc. Price, Consensus and EPS Surprise
Essex Property Trust, Inc. price-consensus-eps-surprise-chart | Essex Property Trust, Inc. Quote
Brixmor Property Group BRX: Headquartered in New York, the REIT is engaged in the ownership and operations of a national portfolio of open-air shopping centers. Its properties feature a diverse array of successful national, regional and local retailers.
BRX's shopping centers are strategically situated near residential areas, functioning as last-mile distribution hubs. The portfolio is carefully curated with non-discretionary and value-oriented retail, as well as consumer-oriented service providers.
Brixmor currently carries a Zacks Rank #2. Over the past month, the Zacks Consensus Estimate for the current-year FFO per share has witnessed an upward revision to $2.13, indicating a 4.41% year-over-year rise.
Brixmor Property Group Inc. Price, Consensus and EPS Surprise
Brixmor Property Group Inc. Price, Consensus and EPS Surprise
Brixmor Property Group Inc. price-consensus-eps-surprise-chart | Brixmor Property Group Inc. Quote
Lamar Advertising Company LAMR: This REIT is one of the largest owners and operators of outdoor advertising structures in the United States. The impressive footprint of outdoor advertising assets, the unmatched logo sign business, a diversified tenant base across various sectors and a focus on local businesses are tailwinds for Lamar. Efforts to expand the digital platform and technological advancements in the low-cost, out-of-home advertising platform bode well for long-term growth.
Lamar currently carries a Zacks Rank #2. The Zacks Consensus Estimate for LAMR’s 2024 FFO per share has been raised six cents over the past two months to $8.09. The Zacks Consensus Estimate for 2025 FFO per share has also moved up three cents over the same period.
Lamar Advertising Company Price, Consensus and EPS Surprise
Lamar Advertising Company Price, Consensus and EPS Surprise
Lamar Advertising Company price-consensus-eps-surprise-chart | Lamar Advertising Company Quote
Cousins Properties CUZ: This Atlanta, GA-based office REIT has an unmatched portfolio of Class A office assets concentrated in the high-growth Sun Belt markets. This region is experiencing a population influx. Amid favorable migration trends and a pro-business environment, corporate relocations and expansions in the Sun Belt markets have gained pace, and this is driving the demand for office space.
Cousins Properties is seeing a recovery in demand for its high-quality, well-placed office properties, as highlighted by a rebound in new leasing volume. CUZ’s impressive tenant roster, opportunistic investments and developments in the best sub-markets and strong balance sheet will aid the growth momentum.
CUZ currently carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2024 FFO per share has been revised north over the past month and is currently pegged at $2.67.
Cousins Properties Incorporated Price, Consensus and EPS Surprise
Cousins Properties Incorporated Price, Consensus and EPS Surprise
Here’s how the above stocks have performed in the past three months.
Zacks Investment Research
Image Source: Zacks Investment Research
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.
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