It’s been a tough 2022 for real estate investment trusts. The FTSE Nareit All Equity REITs index has dropped 20% year to date through Sept. 16 amid roaring inflation and soaring interest rates.
That slide exceeds the 19% decline for the S&P 500 and could represent a buying opportunity for you. Bank of America strategists see it that way.
REITs represent their “favorite market-weight sector, since it offers inflation-protected income with high yield and growing distributions,” BofA analysts wrote in a commentary. The income is inflation-protected because rents often rise in synch with inflation.
Also, “historically, real estate is a late cycle outperformer and ranks No. 2 behind energy on upward [earnings] revisions [by analysts] in 2022, with fundamentals remaining solid,” the analysts said.
They like apartment REITs. “Multi-family has never looked this good, given record occupancy levels, healthy rent-to-income ratios, persistent underbuilding of housing and rising mortgage rates making renting more attractive,” they said.
BofA’s Favorites
Here are BofA analysts’ top REIT picks:
· American Homes 4 Rent (AMH). It has a “high-quality single family rental portfolio,” the second largest in the sector, BofA analysts said. “Based on our estimated stabilized forward net asset value, AMH's valuation is attractive with a strong balance sheet.” The analysts cite “limited new supply of single-family homes, structural demographic tailwinds with aging millennials, accretive consolidation/development opportunities, margin-growth prospects, amenity-fee upside and strong management.”
· Federal Realty Investment Trust (FRT). It’s a national strip-mall REIT that owns, operates and develops “high-quality retail properties,” the analysts said. It has properties across coastal markets with a focus on strong demographics and first-ring suburbs. “FRT trades at a significant discount to its historical premium versus peers,” the analysts said. That “presents deep value for a REIT which owns a top-ranked portfolio along with a strong balance sheet and management team.”
· Public Storage (PSA). It’s the largest U.S. self-storage REIT, “with improving margins from technology investments,” the analysts said. “PSA has the strongest balance sheet in the sector.” Key strengths include PSA's non-same store portfolio, which is now 25% of its assets and will “boost internal growth as these assets lease up,” the analysts said. Also, PSA customers are increasing their average length of stay, which is boosting revenue.
· Rexford Industrial Realty (REXR). It’s a “local sharpshooter in the tight Southern California infill industrial market,” the analysts said. “REXR owns, acquires, redevelops and operates warehouses solely in infill Southern California markets near large population centers.” The analysts “expect the strongest rent growth in REXR's markets, with high tenant demand … and supply shrinking from conversions to higher and better use. This will … help REXR deliver the strongest internal growth in the sector.”
· UDR (UDR). “This is an apartment REIT with a geographically diversified portfolio, strong operating platform and well respected management team,” the analysts said. “Its Next Generation Operating Platform is a differentiator that has enhanced … expense margins and is currently in the second phase of operating initiatives which represent over $100 million in potential incremental net operating income. We like UDR's focus on technology…”
