Business Is Good In REIT Land

At the beginning of 2016, analyst firm RBC Capital Markets published its US REIT Outlook, which laid out the fundamentals for each of the major real estate sectors for the year. Following the 1Q16 earnings season, the firm feels very comfortable that little has changed with the fundamental outlook. What has changed, however, is stock pricing. The firm’s RMZ target for this year is 1175. “After starting the year at 1101, the REITs fell in the first quarter to a low of 971 before reaching the price today of 1175—our target for the year.” So, while little has changed in the fundamentals picture, REITs are now fully priced in the firm’s view. Specifically this quarter, the firm says that 62% of the companies exceeded consensus estimates, one of the highest levels it has on record. And perhaps as importantly, the firm says that only 11% of companies missed estimates, the lowest level that it has on record. The remaining 27% of the REITs met consensus estimates. This quarter, the firm notes that “no sector fell below 2.0, where net beats equal net misses.” So who is leading the charge? RBC says that data centers and residential led the charge, but community centers, office and storage were not far behind. Looking ahead, the firm’s says that they would expect the REIT management team to take a very conservative stance with regard to earnings guidance. “Though that dynamic played out in certain sectors including apartments and lodging, we still saw a solid number of guidance increases despite the fact that the year is only four months old.” This past quarter 41% of the companies raised their 2016 guidance at the midpoint and an additional 54% of the companies maintained guidance and only 5% lowered guidance, the firm says. “Data centers and storage led the way in terms of guidance increases while healthcare, net lease and residential were the laggards.” Importantly, however, no sector had net guidance decreases for the quarter, the firm adds. “In all, it appears to us that the fundamental outlook for the REIT sector remains healthy and that the management teams are confirming that observation.”