BANK OF AMERICA: Buy these 7 real estate stocks with cast-iron balance sheets and strong pricing power that look poised to soar even as rates rise

  • Bank of America’s regime indicator has moved to mid-cycle, a point where good inflation goes up and rates rise.
  • BofA analysts recommend investors consider the mid-cycle environment when investing in real estate stocks.
  • We list Bank of America’s top seven real estate stock picks with mid-cycle protections.
  • See more stories on Insider’s business page.

The property market is firing on all cylinders and the re-opening trade is priced into many real estate stocks, but that doesn’t mean there aren’t still plenty of investment opportunities within the sector, according to Bank of America.

Bank of America’s “regime change indicator” moved to mid-cycle recently, which signals a need for change in strategy when investing in real estate investment trusts, according to the bank’s equity analysts.

A real estate investment trust (REIT) is a company that owns, operates, or finances real estate. Investors can buy and sell REITs on the stock market and earn dividends from real estate investments.

The mid-cycle environment

The mid-cycle regime is the point at which capital expenditures outpace consumption, interest rates rise and good inflation picks up, Jeffery Spector, a Bank of America analyst, said in an April 6 research note.

As much of the re-opening trade is already factored in, with only the potential of the “return-to-office” narrative to push the trade forward over the short-term, investors should now be focused on real estate investment trusts that can respond to this mid-cycle environment, Spector said.

The analysts recommend looking for companies and trusts that have the ability to raise rents and leverage pricing power, as well as those with strong balance sheets that can withstand rising interest rates.

Interest rates are currently at all-time lows and will not rise until the economy reaches full employment and inflation is at 2%, according to the Federal Reserve, with the earliest rate hike looking likely to be 2023.

However, some experts in the investment community believe rates will increase sooner, perhaps even next year, if the US economic recovery continues to exceed expectations following the pandemic.

Pricing power and a strong balance sheet will help create cash-flow growth and support REIT distributions and distribution growth as society moves into a recovery environment, Spector said.

Real estate positioning

The analysts are recommending investors focus on the following sectors:  industrial, infrastructure, manufacturing housing, self-storage, towers and single-family.

This list of sectors are very similar to those Bank of America’s team listed last year as investment opportunities. This is because there was an expectation at the time that COVID-19 could significantly shape real estate, and instead it has simply accelerated pre-pandemic trends, Spector said.

“It turns out the pandemic simply accelerated some pre-COVID trends, such as the migration trends mentioned above, retailers adoption of omni-channel retailing, tenant warehouse investment to keep more inventory on hand and improve e-commerce distribution, employers providing work flexibility with an emphasis on employee wellness, and demand for the highest quality office space to foster collaboration, build culture and strengthen brands,” Spector said. “We want to emphasize these trends are significant and will continue to impact REITs for years to come.”

On the other hand, certain REIT sectors may take years to recover, including malls and coastal offices, for example, such as those located in San Francisco and New York, Spector said. 

“There is a high degree of uncertainty around demand, which we believe indicates these sectors will not have pricing power over the next few years at a minimum,” Spector said. “Pricing power and the ability to raise rents are critical to mid-cycle, as well as strong balance sheets, as interest rates rise.”

Stock picks

We break down Bank of America’s seven top US real estate stock picks that will outperform as markets look past the pandemic.

These stocks meet key mid-cycle criteria of pricing power, capex beneficiary, strength of balance sheet, direction of cap rates, direction of street earnings revisions and distribution growth.

1. Alexandria

Ticker: ARE

Sector: Office

Price target: $206

Price target upside (as of report publication): 21%

Analyst commentary: “ARE owns and develops lab space in key life science markets: Boston, Maryland, New York, Research Triangle, San Diego, San Francisco and Seattle. Historically high tenant demand for life science space due to research breakthroughs and R&D funding positions ARE to deliver above average growth through internal growth and development. Capital flows into life science will continue to place upward pressure on comparable asset values.”

Source: Bank of America

2. Brixmor Property Group Inc

Ticker: BRX

Sector: Retail

Price target:  $23

Price target upside (as of report publication): 13%

Analyst commentary: “BRX is guiding to a sector high +11% FFO growth in ’21. BRX’s redevelopment program has continued to deliver through COVID, achieving high single digit yields. BRX’s exposure to essentials / low store closing risk tenant industries coupled with its low rent average rent basis should continue to yield sector high SS NOI, leasing spreads and earnings growth. BRX’s small shop tenants should benefit from another round of stimulus & reopening in its markets.”

Source: Bank of America

3. Americold Realty

Ticker: COLD

Sector: Industrial 

Price target: $44

Price target upside (as of report publication): 13%

Analyst commentary: “COLD is the only publicly traded REIT focused on operating, developing and acquiring of cold storage facilities. We like COLD given (1) its market-leading position in an anti-cyclical industry, (2) its first mover advantage in a niche asset class, and (3) the high development returns it generates vs traditional warehouse operators. We also believe that COLD will be a stand out given the recession resilient industry it operates in.”

Source: Bank of America

4. Duke Realty

Ticker: DRE

Sector: Industrial 

Price target: $50

Price target upside (as of report publication): 17%

Analyst commentary: “DRE is the largest US-only industrial REIT and will benefit from the tenant demand tailwinds of supply chain expansion for e-commerce distribution, an expansion of inventory on hand, and the potential re-shoring of manufacturing in its Midwest and Texas markets. We forecast DRE to deliver same store NOI and earnings growth at the high end of peers. Strong occupancy and rent collections during the pandemic highlighted portfolio resilience.”

Source: Bank of America

5. Equinix

Ticker: EQIX

Sector: Data centers

Price target: $865

Price target upside (as of report publication): 25%

Analyst commentary: “EQIX is a top pick based on strong secular data center demand, exposure to faster growing European and Asian markets, projected revenue growth acceleration, and potential upside to 2021 forecast. Our target AFFO multiple of 32x reflects our view that EQIX should trade at a premium to the REIT average based on: 1) higher projected AFFO growth; 2) a strong (and growing) dividend yield of 1.5%; and 3) positive industry fundamental factors.”

Source: Bank of America

6. Extra Space Storage

Ticker: EXR

Sector: Self storage

Price target: $152

Price target upside (as of report publication): 13%

Analyst commentary: “EXR is the 2nd largest owner of storage in the US, with a high quality portfolio, largest 3rd party platform & one of the best-in-class operating platforms. EXR will benefit as things normalize without auction restrictions dragging occupancy and rental rate restrictions in certain markets. EXR is a good hedge for vaccine risks on sector’s defensiveness as well as the success of the vaccine as “movement” continues to drive growth.”

Source: Bank of America

7. UDR, Inc

Ticker: UDR

Sector: Apartments

Price target: $51

Price target upside (as of report publication): 16%

Analyst commentary: “UDR is an apartment REIT with a geographically diversified portfolio, strong operating platform and well respected management team. The Next Generation Operating Platform is a differentiator that has enhanced controllable expense margins and is entering the second phase, focusing on data analytics and improving the leasing process. We like UDR’s focus on technology, especially as the world continues to change with a focus on low-touch experiences and services. We believe coastal markets will stabilize in 1H21 and UDR’s national mix with coastal and Sunbelt markets will position the REIT well, as renters return to the office.”

Source: Bank of America

Get the latest Bank of America stock price here.

Source: Read Full Article