An adage among real estate investors basically says that you cannot build any more land. While you can always build higher, you still need the land. One of the best assets that most investors are underweighted on is real estate. Those who own a home are technically real estate investors, but home ownership does not produce any income, unless you have rental homes, which can be very capital intensive, not to mention time-consuming.
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The inflation conditions this year are the worst since the early 1980s, and there is no reason to expect things will improve any time soon. In fact, according to the National Federation of Independent Business, about 40% of U.S. small businesses intend to raise prices by 10% or more this year. Add in spiraling food and gasoline prices, and the picture for the rest of 2022 looks increasingly grim.

Many investors are concerned that real estate investment trusts (REITs) will get hit hard in a rising interest rate environment, which has begun in earnest as the Federal Reserve raised the federal funds rate by 50 basis points, and similar or even bigger hikes are expected in June and July, as well as the rest of the year.

The reality is REITs have performed well. In a recent publication, the National Association of Real Estate Investment Trusts had this to say:

Historically, REITs have performed well during periods of rising long-term interest rates with average four-quarter return in periods with rising rates of 16.55% compared to 10.68% in non-rising rate periods from the first quarter of 1992 to the fourth quarter of 2021. Additionally, REITs outperformed the S&P 500 in half of the periods when Treasury yields were rising. The positive association that has historically been observed between periods of rising rates and REIT returns is consistent with an improvement in the underlying fundamentals.

Jeffrey Spector of BofA Securities is one of Wall Street’s top REIT analysts, and he has put together a list of the firm’s top picks across the many sectors in which REITs are prominent. This was noted in a report discussing the sector:

With BofA indicators signaling late cycle, we are recommending investors focus on high quality REITs. Quality is a key attribute to stock outperformance late cycle. We believe higher quality REITs will offer the best earnings and distribution growth in 2022. Quality REITs have the following attributes 1) pricing power/inflation protected income; 2) ability to beat & raise leading to upward Street revisions; 3) multi-year earnings visibility based on secular drivers of growth; 4) strong global inflows resulting in rising asset values & steady / lower cap rates despite higher rates; 5) strong balance sheets; and 6) visible/ above average distribution growth.

Seven top companies are recommended While all are rated Buy at BofA Securities, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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Shopping Centers

Kimco Realty Corp. (NYSE: KIM) makes sense for investors who are more conservative. This top REIT has specialized in shopping center acquisitions, development and management. It owns and operates the nation’s largest portfolio of neighborhood and community shopping centers with interests in the company-owned interests in 430 U.S. shopping centers comprising 75 million square feet of leasable space, primarily concentrated in the top major metropolitan markets.

Kimco Realty stock investors receive a 3.43% distribution. The BofA Securities price target is $30, and the consensus target is $27.65. The shares closed on Monday at $23.35.

Office Buildings

With employees finally returning to work, Corporate Office Properties Trust (NYSE: OFC) is a solid contrarian play in the sector. It owns, manages, leases, develops and selectively acquires office and data center properties. Most of its portfolio is in locations that support the U.S. government and its contractors, most of whom are engaged in national security, defense and information technology activities servicing what it believes are growing, durable, priority missions.

The company also owns a portfolio of office properties located in select urban and urbanlike submarkets in the Greater Washington/Baltimore region with durable Class-A office fundamentals and characteristics. As of December 31, 2020, it derived 87% of its core portfolio annualized rental revenue from Defense/IT locations and 13% from regional office properties.

As of the same date and including 17 properties owned through unconsolidated joint ventures, the company’s core portfolio of 179 office and data center shell properties encompassed 20.8 million square feet and was 95.0% leased. It also owned one wholesale data center with a critical load of 19.25 megawatts that was 86.7% leased.

Investors receive a 4.28% distribution. The BofA Securities price objective on Corporate Office Properties Trust stock is $34. The consensus target is $31.64, and shares ended Monday trading at $25.70.

Self-Storage

This giant self-storage leader Public Storage Inc. (NYSE: PSA) has been a go-to REIT stock for investors for years. It is a fully integrated, self-administered and self-managed REIT that primarily acquires, develops, owns and operates self-storage facilities.
As of September 30, 2020, the company had interests in 2,504 self-storage facilities located in 38 states with approximately 171 million net rentable square feet in the United States. It had an approximate 35% common equity interest in Shurgard Self Storage, which owned 239 self-storage facilities located in seven Western European nations with approximately 13 million net rentable square feet operated under the Shurgard brand.
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Furthermore, Public Storage had an approximate 42% common equity interest in PS Business Parks, which owned and operated approximately 28 million rentable square feet of commercial space.

Investors receive a 2.55% distribution. The BofA Securities price objective is $473, while the consensus target for Public Storage stock is lower at $413.33. Monday’s final print was $313.69 a share.

Industrial

Rexford Industrial Realty Inc. (NYSE: REXR) could really take off if the economy holds together, and it is also a member of the BofA Securities US1 list of top stock picks. This REIT is focused on owning and operating industrial properties throughout Southern California infill markets. It owns 232 properties with approximately 27.9 million rentable square feet and manages an additional 20 properties with approximately 1.0 million rentable square feet.

The company has plans to grow its portfolio and earnings through market rent and occupancy growth, and it has a large pipeline of acquisitions in the same region.

Investors receive a 1.86% payout. The $96 BofA Securities price objective is higher than the $92.00 consensus target. Rexford Industrial Realty stock closed on Monday at $67.64.

Manufactured Housing

With an aging population that is traveling while scaling down, this is a solid choice for investors. Sun Communities Inc. (NYSE: SUI) is a fully integrated REIT that has been in the business of acquiring, operating, developing and expanding manufactured home and recreational vehicle (RV) communities since 1975.

As the nation’s premier owner and operator, the company prides itself in its commitment to its residents and guests, bringing them outstanding amenities, value and customer service consistent with the Sun Communities experience.

Consumers interested in buying a home, leasing one, finding a home site for their current manufactured home, or looking for the most desirable RV resorts across the country, this company serves all those needs. Its trusted position in the market, with prime locations throughout the United States and Canada, offers customers outstanding organizational management that makes Sun Communities the best choice in active living.
Investors in Sun Communities stock receive a 2.23% distribution. BofA Securities has set a $224 price objective. The consensus target is $215.90, and the stock closed on Monday at $157.77.
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Apartments

If there is one investment that never goes out of favor it is apartment living, and UDR Inc. (NYSE: UDR) is a premier player in the industry. It is an S&P 500 company and a leading multifamily REIT with a demonstrated performance history of delivering superior and dependable returns by successfully managing, buying, selling, developing and redeveloping attractive real estate communities in targeted U.S. markets.

As of September 30, 2020, UDR owned or had an ownership position in 51,649 apartment homes, including 1,031 homes under development. For over 48 years, UDR has delivered long-term value to shareholders, the best standard of service to residents and the highest quality experience for associates.

UDR’s development pipeline aggregated $689 million at the end of the reported first quarter and was 66.5% funded. The active pipeline includes seven development communities for 1,832 homes.

Investors receive a 3.19% distribution. The UDR price target at BofA Securities is set at $68, while the consensus target is $61.60. Monday’s last trade was reported at $47.69.

Health Care

Welltower Inc. (NYSE: WELL) pays a solid distribution and is a pure play on the aging U.S. population. This fully integrated and self-administered REIT is invested across the full spectrum of health care real estate.

The company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate infrastructure needed to scale innovative care delivery models and improve people’s wellness and overall health care experience. Welltower owns interests in properties concentrated in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties.

Shareholders receive a 2.80% distribution. The BofA Securities price target is $110. The consensus target is $98.02. Welltower stock closed at $87.06 on Monday.

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These seven top companies are leaders in their real estate niches, and their shares offer long-term investors who are seeking stability in a very precarious time for the stock market some solid additions to growth and income portfolios. Note that REIT distributions may contain return of principal.

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