5 Soaring REIT Stocks That Might Lose Steam In 2018

The rising interest-rate environment and an aging real estate cycle have taken a toll on the performance of real estate investment trusts (REIT) in 2017. In fact, since the beginning of the year through Dec 22, 2017, the industry has underperformed the broader market, as indicated by the FTSE/NAREIT All REITs Index’s total return of 7.7% over this time frame versus the S&P 500’s 22.2% gain.

In addition, the Fed’s recent decision to hike benchmark interest rates by a quarter point to a target range of 1.25-1.5% along with the tax reforms remain the biggest near-term challenges for REITs heading into 2018. Since REITs are heavily dependent on debt for acquisitions, development, and redevelopment, higher interest rates raise the debt-financing costs and impact the profitability from such endeavors. Also, since REITs are seen as bond substitutes, amid a rising rate environment, dividend paid to investors might appear less attractive.

Furthermore, with corporate taxes being significantly slashed, the valuation premium, which REITs previously enjoyed on account of tax advantages, shrinks. Specifically, lower taxes are anticipated to accelerate earnings growth for the broader markets but the same might not be beneficial for REITs.

Also, the increased risk appetite of investors highlights that capital will not be flowing in this defensive sector. This, along with the skinny earnings growth rates for REITs, will likely put the sector at a comparative disadvantage in the year to come.

Although some stocks gained in 2017, on the back of robust fundamentals and/or improving outlook of individual asset categories, the above-mentioned factors are expected to impede growth in 2018.

In order to identify these stocks, we have created a three-faceted screen. First of all, we picked stocks that have gained more than 2% in the year-to-date (YTD) period.

Next, we considered companies with market capitalization of more than $1 billion.