Real Estate Investors Shrug Off Threat Of Rate Hike

December 16, 2015
12/11/2015 06:34 PM ET

Investors are bidding up real estate investment trusts despite concerns about higher interest rates. The property REIT group has climbed 19 places over the past six weeks, to No. 40 out of 197 as of Friday’s IBD. Storage stocks have performed especially well, accounting for four of the top 16 stocks in the group as acquisitions and limited supply allow them to boost rents.

Yet it may become more difficult for REITs to finance new acquisitions and build new structures such as storage units, hospitals and office buildings if, as expected, the Federal Reserve raises interest rates on Wednesday. Higher rates may also prompt investors to move money into other income investments, such as bonds.

Yet it appears that investors expect borrowing costs to remain low for some time amid slow-but-steady economic growth.

Extra Space Storage (NYSE:EXR), which buys, operates and develops self-storage facilities in 36 states, boasts a best-possible 99 Composite Rating. It’s up about 45% this year and is 9% past a 78.42 cup-with-handle entry, out of buying range.

On Monday, KeyBanc Capital Markets upgraded Extra Space to overweight from sector weight, calling it a “premium growth vehicle,” according to TheStreet.com. Extra Space in October bought California-based SmartStop Self Storage for about $1.4 billion.

Its Q3 results, released Oct. 28, showed that same-store revenue rose 9.9% from a year ago thanks to rising occupancy, higher rental rates and lower customer discounts.

“Fundamentals for the sector continue to be strong,” Extra Space CEO Spencer Kirk said after the report. “We expect occupancy to remain at all-time highs, which should allow us to further increase rates to new and existing customers.”

Funds from operations, the main measure of a REIT’s profitability, is expected to rise 15% to $3 a share this year followed by a 21% increase next year.

Public Storage (NYSE:PSA), which buys and operates self-storage facilities in the U.S. and Europe, is well out of buying range after clearing a 218.09 buy point Oct. 5.

The stock “has the potential to move even higher, given improving fundamentals of the storage real estate sector, and superior performance of its properties and strategic acquisitions,” Zacks Equity Research said Nov. 23.

Zacks, which has a buy rating on the stock, said an improving economy and a lack of new supply have helped Public Storage trim its marketing and promotion costs.

Annual FFO is expected to rise 9% this year to $8.77 a share, followed by a 10% gain in 2016.

Sovran Self Storage (NYSE:SSS) and CubeSmart (NYSE:CUBE) are the other two top storage stocks in the property REIT group.

Sovran is holding above a 98.21 cup-with-handle buy point.

CubeSmart is out of buying range. It’s seen FFO growth accelerate for two straight quarters.

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