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Quarter-End Insights

Our Outlook for Real Estate Stocks

Equity REITs continue to benefit from solid growth, operating, and dividend fundamentals.

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  • Equity REITs continue to trade at premiums to fair value, based on attractive operating and balance sheet fundamentals and "growth and income" characteristics.   
  • We estimate annual equity REIT dividend growth of 3%-5% in the near to medium terms.   
  • Healthy commercial real estate supply and an improving economic environment continue to boost equity REITs' operating fundamentals, cash flows, and underlying portfolio valuations. 
  • We believe equity REIT valuation premiums and persistent global economic uncertainty and volatility require REIT investors to be more cautious and selective.

According to the National Association of Real Estate Investment Trusts, or NAREIT, equity REITs delivered year- and quarter-to-date total returns (through mid-June) of 11.7% and 8.0%, ahead of the 8.0% and negative 4.1% for the S&P 500, respectively. The relatively strong performance has resulted in equity REIT shares continuing to trade at valuation premiums, the catalysts being relatively high and sustainable dividend yields, improving portfolio operating fundamentals, healthy capital structures, and the potential benefits as a hedge against eventual higher interest rates and inflation. For example, on average, equity REIT dividend yields are 3.30% (range average 3.00%-6.50%), well above the 10-year Treasury and S&P 500 yield of 1.58% and 1.50%, respectively, and same-store real estate portfolio operations are either stabilizing or beginning to experience renewed growth from increased occupancy and rental rates. Equity REITs also maintain healthy debt/EBITDA and fixed-charge coverage ratios averaging 7.0 times and 2.6 times, respectively.

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Philip J. Martin does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.