Needless to say, with the lowest interest rates since 2016, and a very bloated and fully valued stock market, many investors are struggling to find investment options that make sense now. One thing is for sure: interest rates are going nowhere for the foreseeable future, and they stand a very good chance of going lower this fall, as two more interest rate cuts could be in the cards.
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In a new Jefferies research report, equity strategist Steven DeSanctis shifts his rating on the real estate sector to Overweight from Underweight. He notes this in the report:
The sector tends to outperform when the Fed cuts rates, earnings growth has been solid, the sector is inversely correlated with the VIX, has seen weaker ETF flows to date and is still under owned by Small and Mid cap managers.
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The Jefferies team also had 10 top reasons for owning the sector now.
- The correlation between the 10-year Treasury and relative performance stands at −0.3.
- When the Federal Reserve has cut rates in the past, real estate gets out to a slow start but relative performance picks up and the group has outperformed.
- Volatility continues to rise and the sector is inversely correlated with the VIX index.
- If investors want to be domestically focused and not worry about trade wars, this is the sector to be in. On average, less than 5% of revenue comes from outside the United States.
- Earnings growth has been solid for this sector with fewer swings.
- Yes, valuations are expensive on an absolute and relative basis, but again, with rates this low, valuations for the group should be higher.
- The spread in dividend yield versus 10-year Treasury stands at 2.0%, above the average of 1.4%.
- Exchange-traded fund (ETF) flows have NOT been off the charts strong and could pick up, along with money continuing to move into low volatility, and this creates a tailwind for the sector.
- It is still an underowned sector by small-cap value managers.
- Malls are still a big chunk, but weight has fallen and is less impactful on sector.
In addition, Jefferies real estate analyst Jon Peterson has five favorite picks in the sector, all of which the firm rates at Buy.
Corporate Office Properties
The increased spending from the U.S. Department of Defense could prove to be a huge boon for this company. Corporate Office Properties Trust (NYSE: OFC) is a leading owner and developer of high-security office buildings and data centers leased to government and contractor tenants.
Its portfolio is clustered around the largest defense-information technology installations for the U.S. government in Maryland, Virginia, Alabama and Texas. The company also owns a portfolio of traditional office assets in Virginia, Maryland and Washington, D.C., with a concentration in central business district in Baltimore.
Investors receive a solid 3.81% distribution. The Jefferies price objective for the shares is $34, and the Wall Street consensus target is $29.18. The shares closed Thursday’s trading at $28.85 apiece.
Nexpoint Residential Trust
This real estate investment trust (REIT) has shown very solid growth metrics and is reasonably priced. Nexpoint Residential Trust (NYSE: NXRT) engages in the acquisition, management and disposition of multifamily assets. It also focuses on providing lifestyle amenities and upgraded living spaces to low- and moderate-income renters in the southeastern United States and Texas.
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Nexpoint holds over $1.2 billion in real estate assets, largely in value-add multifamily properties. This multifamily expertise continues to give rise to new opportunities, driving the firm’s Delaware Statutory Trust offerings, among other investment strategies. Its real estate assets also include single-family rentals, office and retail, self-storage and hospitality.
Shareholders receive a 2.39% dividend. Jefferies has a price target for the stock, while the consensus target is $45.79. The shares closed most recently at $46.09.
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Rexford Industrial Realty
This company could really take off if the current economic expansion is sustained. Rexford Industrial Realty (NYSE: REXR) acquires, redevelops, owns, manages and operates industrial warehouse properties in Southern California infill markets. The company plans to grow its portfolio and earnings through market rent and occupancy growth, and a large pipeline of acquisitions in the same region.
Rexford posted solid second-quarter core funds from operations that were above the consensus forecast. Portfolio metrics remain very solid, especially leasing spreads. Management bumped guidance midpoint to in-line with Wall Street. In addition, the revised guidance assumes no acquisitions, which suggests further upside later in the year.
Investors receive a 1.76% dividend. The $50 Jefferies price objective compares with a $45 consensus figure and the most recent close at $42.12 a share.
STAG Industrial
This is another strong industrial play that offers solid upside potential. STAG Industrial Inc. (NYSE: STAG) is a self-managed full-service real estate company focused on the acquisition, ownership and management of single-tenant, Class B warehouses in secondary markets across the United States. The company continues to focus on expansion of its acquisition platform to find acquisitions to grow the portfolio.
The company posted funds from operations that were in line with the consensus estimate. Revenues rose around 13.1% year over year but fell short of expectations. When the company reported earnings, it also moved 2019 acquisition guidance by $50 million to $750 million to $900 million.
Shareholders receive a very attractive 4.82% dividend. Jefferies has set its price target at $34. The consensus target is $32.45, and the stock closed on Thursday at $29.69.
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UDR
This off the radar company could be ready for a major breakout. UDR Inc. (NYSE: UDR | UDR Price Prediction) is a multifamily REIT that owns, operates, acquires, develops and redevelops apartment communities across the United States. The company’s top markets (including shares of joint ventures) are New York, metro D.C. and Orange County and San Francisco in California.
As of the second quarter of 2019, UDR owned or had an ownership position in 50,829 apartment homes, including 366 homes under development. The west coast and the sunbelt areas continue to spur growth, with metrics in San Francisco, Seattle and New York improving sequentially.
Investors receive a 2.96% dividend. The Jefferies price target is $54. The consensus target of $47.16 is still above the most recent closing price of $46.73 a share.
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These smaller capitalization companies are all focused on domestic business and don’t have the kind of overseas exposure that some of the biggest REITs have, plus they offer investors solid dependable distributions, which make sense in a low yield environment.
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