Bank of America Securities analyst Jeffrey Spector made a prediction for REIT investment in 2023, despite real estate’s underperformance in the downturn. And many economists and economists expect a collapse next year as the Federal Reserve continues to raise prices in its anti-inflation campaign.
“We see a bull run for quality REITs with BofA Investment Strategy favoring long bonds in 1H23 & long stocks in 2H23,” Spector wrote in a recent note to clients. “In our view, high-quality REITs offer the best value because they are stocks with bond-like properties.”
BofA economists expect a mild economic slowdown starting in Q1 and ending in Q3, with unemployment rising to 5.5% in Q1 2024. Spector points out that REIT policies typically weaken the economy by four to six months, so weak demand may not be seen as a factor. until mid-2024.
“As a result, we believe that ’23 guidance will be more conservative with more brands, another risk worth watching,” he wrote. BofA’s REIT payout in 2023 is below Street consensus. More cuts are expected.
With the economic crisis, the volume of sales will remain low, “and we will not have a price until 2H23.” However, high-end REITs see more opportunities as private equity owners face cash flow problems. Spector advises investors to focus on quality and earnings in ’23.
The key characteristics of a REIT are; lower prices when you experience a recession; the visibility of many years of income in relation to the size of the country; strong, flexible sheets; visible growth and beyond; and high expectations of global inflows that keep the economy stable and interest rates stable despite rising rates.
By sector, BofA’s Spector said industrial, manufacturing, residential and high-rise buildings are the most attractive for demand. “We believe these divisions will show significant value potential in ’23 based on their many years of global experience and will ensure consistent earnings and distribution growth,” he wrote.
Here are his stock picks by sector and what he has to say about them:
- Single-family rentals: American Homes 4 Rent (NYSE: AMH), which has the second largest single-family rental housing market, benefits from a new shortage of single-family homes and increased population. “As interest rates rise, we expect demand for single-family loans to increase as homeownership begins to slow down.”
- Self Storage: CubeSmart (NYSE: CUBE), with the best track record and the highest exposure in NYC, showed the best peers in terms of financial growth in 2023 and has an attractive value with the lowest 2023 PEG and PEGY ratio. “We see the NYC market as a catalyst for continued growth due to its high density, unique demographics, and strong demand.”
- Office: Corporate Office Properties Trust (NYSE: OFC), with high-end office storage and data centers in the Washington, DC, area and Huntsville, AL, area, primarily serves the federal government and defense contractors. “We expect demand and bookings for OFC’s housing and development projects to improve among their office counterparts who are increasingly vulnerable to political and economic pressures.”
- Industrial: Prologis (NYSE: PLD), which has the world’s largest industrial and property fund business, also has a very strong portfolio in the REITs sector and should benefit from the demand for e-commerce and the pick-up in US manufacturing. “We expect PLD to continue to increase its SS NOI growth by +8% as it maintains cost-effectiveness due to limited availability and its markets with higher rental growth prospects compared to peers.”
- Products: Regency Centers (NASDAQ:REG), the second largest REIT, focuses on high-traffic shopping centers. “We believe REG will continue to benefit from a strong retail environment as retailers continue to increase store footprints and add more retail space.” Additionally, the REIT expects to spend $150M-$200M annually over the next five years.
- Buildings: Sun Communities (NYSE: SUI) acquires, operates, maintains, and expands recreational vehicle facilities and marinas. “SUI is in a unique position within REITs in 2023 given the guidance to accelerate rate growth. Management is also focused on managing the funds of the organization as a whole.”
- Healthcare: Wellcare (NYSE: PA), which has larger buildings, professional/medical buildings, and medical offices, is well positioned to increase occupancy as the buildings recover from the pandemic. “WELL has access to information about the largest housing companies in our entire universe and demographically they have an excellent track record. Longer, demographic trends are positive as baby boomers continue to age.”
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