Jefferies Debuts 'Lucky 7' Top REIT Picks For 2015
During 2014, publicly traded equity REITs that own commercial real estate had a banner year.
The MSCISREIT Index (INDEXNYSEGIS: RMZ) clocked in with returns of just over 25 percent, or about double the gains of the S&P 500 in 2014.
After such great performance by the RMZ -- ending 2014 just 5 percent below its all-time high -- what should REIT investors expect for 2015?
REITs Poised To Hit New Highs
According to Jefferies REIT analyst Omotayo Okusanya, 2015 equity REIT performance will be positive, driven by:
- U.S. GDP growth estimated by Jefferies to be 3.3 percent.
- An expectation of continuing low interest rates and availability of capital.
- REIT NOI growth fueled by increased demand and relatively limited new supply.
Jefferies is forecasting a 13 percent total return for REITs in 2015.
Jefferies 'Lucky 7' Top REIT Picks
In addition to continued strong performance for the entire REIT sector, Jefferies has chosen seven of its Buy rated REITs as top picks. They are presented in order of conviction along with a brief justification for each pick
1. CyrusOne Inc (NASDAQ: CONE) is one of five data center REITs. This subsector should continue to benefit from an improving overall business environment, as well as continued growth in outsourcing, wireless data, cloud computing and big data. However, the price target (PT) was reduced to $32 from $34, with Jefferies noting CyrusOne has a 30 percent industry exposure to oil and gas.
2. SL Green Realty Corp (NYSE: SLG) is an office REIT with a portfolio concentration in New York City. Jefferies expects CBD (central business district) office fundamentals to continue on an upward trend noting: accelerating economic growth, improving employment figures and easy access to relatively cheap capital. While considerable NYC office development is underway, demand continues to outstrip supply in the short term. PT was increased from $130 to $142.
3. CubeSmart (NYSE: CUBE) is one of four self-storage REITs. With occupancy already at high levels, Jefferies sees short duration leases (typically month to month) being able to be re-priced at higher rates, leading to growth in SS NOI (same-store net operating income). PT was increased from $24 to $27.
4. Omega Healthcare Investors Inc (NYSE: OHI) growth will be accelerated by the AVIV acquisition in 2015. Jefferies sees healthy earnings accretion from debt refinancing occurring in a low interest rate environment. Omega Healthcare is trading at 14.2x AFFO, or about a 13 percent discount to healthcare REIT peers. PT was increased from $43 to $47.
5. Simon Property Group Inc (NYSE: SPG) was a valuation call. Jefferies viewed the mall landlord as relatively "inexpensive stocks" with solid earnings outlooks that "underperformed" last year. PT was increased from $201 to $220.
6. Mid-America Apartment Communities Inc (NYSE: MAA) is poised to benefit from SS NOI growth in the 4 to 5 percent range as the company continues accretive growth resulting from upgrading units in its existing portfolio. Jefferies noted that Mid-America Apartment's could benefit from multiple expansion as it trades at a 14.9x forward FFO, compared to its multifamily REIT peers trading at an average of 21.3x FFO. PT was increased from $71 to $88.
7. DDR Corp (NYSE: DDR) was also a valuation call. Jefferies similarly viewed the power center focused stock as relatively "inexpensive" with solid earnings outlooks that "underperformed" last year. PT was increased from $21 to $22.
Jefferies feels that the REIT sector is poised for another leg up, albeit a much smaller increase compared to the "perfect storm" of 2014. Investors looking to include REITs in a diversified portfolio can also choose from an array of REIT ETF options or mutual funds.
Image credit: Feltolto, Wikimedia
Latest Ratings for CONE
|Dec 2016||Guggenheim||Initiates Coverage On||Buy|
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