Following some sluggishness over the preceding two months, the employment market seems to be back on track once again, delivering the largest job additions for the year in October. Record data has brightened the prospects of a rate hike in December. As a result, several interest-sensitive sectors in the equity markets have witnessed massive declines.

However, a surging dollar may force the Fed to hike rates at an extremely slow pace. Additionally, other factors may moderate the extent to which rates are hiked besides their impact. Though counterintuitive at first, picking real estate investment trusts (REITs) may continue to be a good idea in such an environment. Using the correct metrics may lead to excellent picks at bargain prices.

Job Additions to Spur Rate Hike

A record number of 271,000 jobs were added during the month of October. This is the highest figure recorded this year. Additionally, the increase in average hourly earnings on a yearly basis is the highest in six years. Moreover, unemployment has declined to 5%, the lowest experienced in seven and a half years.

Disappointing job additions and the sluggish pace of wage growth had stayed the Fed’s hand in August and September. In October, Fed officials had hinted at the possibility of a rate hike in December. This jobs report may be just the kind of impetus the central bank was looking for.

Dollar Bull Run to End?

However, a surging dollar may have a significant impact on the Fed’s decisions. Following the release of October’s jobs data, the dollar has risen above its highest level recorded for the year. At one point, the Bloomberg Dollar Spot Index climbed to its highest level recorded in more than a decade. On Monday, the greenback increased 0.2% to 123.37 yen in Tokyo.

Some market watchers believe that this spike could end the dollar’s Bull Run. This is because it could lead to statements from Fed officials that such a trend could curb the degree by which rates are hiked. Such a statement could push the dollar lower.

Such a feeling emanates from the events of October. The Federal Open Market Committee’s minutes for September had expressed concern over the “strong appreciation” of the dollar against currencies of emerging economies. This led to a 0.4% decline in the dollar on the 8th of last month.

However, strategists still think the dollar rally will continue. This is because the U.S. continues to be the world’s economic growth engine. Unlike Europe, several emerging economies and, most importantly, China, the economy of the U.S. continues to experience steady growth. This is why the dollar’s attractiveness as a safe haven will continue over the medium term, increasing its value.

Are REITs Still Worth Investing In?

Following the jobs report, the Bloomberg REIT Index lost 3.1%, the highest fall since a 4.7% decline on Aug 24. A post-rate hike environment is not expected to be conducive to a sector which has gained during a period of record low rates.

However, several factors, including a surging dollar, may reduce the pace and extent of rate increases. The market should be able to price in such changes fairly quickly. Further, rates are being hiked only as a result of an improvement in the economic situation. This means that demand for housing, storage and office space, the last of which will directly benefit from continuing job additions, will continue to increase.

Our Choices

Apart from a surging dollar and higher demand for real estate, historical evidence shows us that REITs have been good performers during a period of rising rates. When rates were increased between 2004 and 2006, commercial property values also rose.

This is why it may be a good idea to pick REIT stocks at relatively lower prices now. A value-based approach would aid you in making prudent additions to your portfolio. Our selection is also backed by a good Zacks Value Score and Zacks Rank.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.

CBL & Associates Properties Inc. (CBL - Snapshot Report) is a fully integrated real estate investment trust (REIT) which owns, develops, acquires, leases, manages, and operates regional shopping malls, open-air centers, community centers and office properties.

CBL & Associates holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 6.32, compared to the industry average of 16.96. The stock has a PEG ratio of 2.16 compared to the industry average of 2.65. It has a price-to-sales (P/S) ratio of 2.31, lower than the industry average of 7.64. 

Rouse Properties, Inc. (RSE - Snapshot Report) is a REIT and operates as one of the largest mall owners in the U.S.

Rouse Properties holds a Zacks Rank #2 (Strong Buy) and has a Value Style Score of ‘B.’ The company has a P/E (F1) of 10.45, compared to the industry average of 16.96. The stock has a PEG ratio of 1.46, compared to the industry average of 2.65. It has a P/S ratio of 3.53, lower than the industry average of 7.64.                                                                                 

Preferred Apartment Communities, Inc. (APTS - Snapshot Report) is a REIT which acquires and operates multifamily properties primarily in the U.S.

Preferred Apartment Communities holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ It has a P/E (F1) of 9.77, compared to the industry average of 17.69. The stock has a PEG ratio of 1.40, compared to the industry average of 2.66. It has a P/S ratio of 2.64, lower than the industry average of 6.03.

City Office Reit, Inc. (CIO - Snapshot Report) is a REIT which focuses on acquiring, owning and operating office properties in the U.S.

City Office Reit holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘B’. The company has a forward price to earnings ratio of (P/E) of 9.76, compared to the industry average of 13.36.  The stock has a PEG ratio of 0.98 compared to the industry average of 2.39. It has a P/S ratio of 3.31, lower than the industry average of 5.77.