During the massive selling back in the spring, one area that was hit very hard was the real estate investment trust group. Some of the segments within the REIT silo were tagged especially hard due to the shutdowns seen across the country. With interest rates at close to all-time lows, the REITs offer not only incredible income potential but also the potential for some big upside in the share prices.
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A new Jefferies research report previews the top companies in the firm’s REIT coverage. While the analysts are positive on five of the segments, two look extremely tempting now. They said this in the report:
The second quarter of 2020 is the first quarter where we can better understand the COVID lockdown’s damage on earnings. Results will vary widely. Retail, Hotels, and Senior Housing will be impacted the worst, while Data Centers and Industrial should report strong results. As expectations for a weak second quarter are mostly priced in, commentary and indicators guiding longer-term outlooks should drive relative performance.
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While Jefferies also cites industrial REITs as a solid area, here we look at the two areas they favored, and both have had big runs off the lows printed in March. First are three medical office building REITs as strong income and total return plays. With elective surgeries back on in most states, most of the tenant problems in the second quarter of this year should be remedied by year’s end. Three data center REITS follow and are perhaps the optimal place to be for strong alpha potential and respectable dividends.
All six stocks are rated Buy and make sense for investors looking to move capital for second-half positioning. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Healthcare Realty Trust
This medical REIT has been hit extremely hard and is trading just above its 52-week low. Healthcare Realty Trust Inc. (NYSE: HR | HR Price Prediction) integrates owning, managing, financing and developing income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States.
As of March 31, 2020, the company owned 212 real estate properties in 25 states, totaling 15.8 million square feet, and was valued at approximately $5.3 billion. The company provided leasing and property management services to 12.0 million square feet nationwide.
Investors receive a 4.14% distribution. Jefferies has a $30 price target on the shares, and the Wall Street consensus target is $30.90. Thursday’s closing price was $29.02 a share.
Healthcare Trust of America
This stock rebounded nicely off the March lows but has backed up over the past month and is offering a solid buy-in level. Healthcare Trust of America Inc. (NYSE: HTA) is the largest dedicated owner and operator of medical office buildings in the United States, comprising approximately 24.9 million square feet of gross leasable area, with $7.3 billion invested primarily in medical office buildings, as of March 31, 2020.
The company provides real estate infrastructure for the integrated delivery of health care services in highly desirable locations. Investments are targeted to build critical mass in 20 to 25 leading gateway markets that generally have leading university and medical institutions, which translates to superior demographics, high-quality graduates, intellectual talent and job growth.
The strategic markets Healthcare Trust of America invests in support a strong, long-term demand for quality medical office space. They utilize an integrated asset management platform consisting of on-site leasing, property management, engineering and building services, and development capabilities to create complete, state of the art facilities in each market.
Investors receive a 4.7% distribution. Jefferies has set a $31 price target. The consensus target is $29.00, and shares were last seen trading at $26.83.
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Medical Properties Trust
This company may be offering investors the best value at current price levels. Medical Properties Trust Inc. (NYSE: MPW) acquires, develops and invests in health care facilities and leases health care facilities to health care operating companies and providers. The company also provides mortgage loans to health care operators, as well as working capital and other term loans to its tenants/borrowers.
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With a growing portfolio and a versatile business model, the company continues to rank high across Wall Street. The analysts noted that the company’s acute care hospitals rent coverage increased nicely and the company attributed the increase to better cost controls and higher patient admissions.
Investors receive a 5.68% distribution. The $22 Jefferies price target is well above the $13.58 consensus target. The shares closed at $19.01.
CyrusOne
This is a top pick among the data center stocks. CyrusOne Inc. (NASDAQ: CONE) designs, builds and operates facilities across the United States, Europe and Asia that give its customers the flexibility and scale to match their specific growth needs. Specializing in highly reliable enterprise-class, carrier-neutral data center properties, the company provides robust data center infrastructure to ensure the continued operation of IT equipment for a rapidly growing list of organizations that now nears 900, including nine of the Fortune 20 and more than 160 of the Fortune 1000 or equivalent-sized companies.
Many analysts feel that some of the best returns in the data center group may be found in the smaller players in the space like CyrusOne. The company trades at numerous lower multiples than their bigger competition, and top analysts feel that the discount valuation is not warranted given the recent surge in leasing and above-average growth. The company also has exhibited faster deployment times, rapid new market expansion and low churn among customers, all bullish reasons for buying the stock.
Unitholders receive a 2.54% distribution. Jefferies has set an $80 price objective, which is in line with the $79.94 consensus target. The shares closed at $78.84 on Thursday.
Digital Realty Trust
This top data center stock is a solid play on the huge cloud and streaming content revolution. Digital Realty Trust Inc. (NYSE: DLR) supports the data center and colocation strategies of more than 600 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia.
Digital Realty’s clients include domestic and international companies of all sizes, ranging from financial services and cloud and information technology services to manufacturing, energy, gaming, life sciences and consumer products. The company rates highest with portfolio managers, as 8.39% of the market cap of the company is in institutional hands.
Top analysts cite the solid dividend and the potential for dividend growth. Many also feel that data center pricing is still favorable and the growth in adoption of the cloud is a huge positive going forward. Lastly, some on Wall Street feel the stock is underweighted by active managers and could see an uptick if they started adding shares in 2020.
Investors receive a 3.07% distribution. The massive $186 Jefferies price target compares with a $149.95 consensus target and the most recent close at $145.79.
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QTS Realty Trust
This is another top pick data center REIT, and it has been rumored to be a takeover target. QTS Realty Trust Inc. (NYSE: QTS) is a leading provider of secure, compliant data center solutions, hybrid cloud and fully managed services. Its integrated technology service platform of custom data center colocation and cloud and managed services provide flexible, scalable, secure IT solutions for web and IT applications.
Its Critical Facilities Management provides increased efficiency and greater performance for third-party data center owners and operators. QTS owns, operates or manages 24 data centers and supports more than 1,000 customers in North America, Europe and the Asia Pacific.
Investors are paid a 2.81% distribution. The Jefferies price target is $75. The consensus target is $71.60, and shares closed at $68.48.
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Six top companies that all have solid total return potential and, perhaps best of all, offer a degree of safety going forward. The market is extremely overbought, and when it backs up to consolidate the gains over the past four months, the move could be dramatic.
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