UBS has named the real estate investment trusts AvalonBay Communities Inc AVB, Federal Realty Investment Trust FRT and Kilroy Realty Corp KRC as top picks.
"Post 3Q, we are now more positive on the multifamily and shopping center REITs and recommend investors Overweight both subsectors," UBS said in a Thursday note.
Despite lowering the sub-sector view on office REITs to Market-weight, given less positive near-term catalysts, UBS said it continues to maintain Kilroy as a top pick.
UBS analyst Nick Yulico offered his take on the REIT sector.
UBS upgraded shares of AvalonBay from Neutral to Buy and increased its price target from $190 to $206. The firm also upgraded Federal Realty from a Neutral to Buy and upped its price target from $131 to $141.
Kilroy is rated a Buy with a $79 price target.
Stability in second- and third-quarter earnings; upwardly revised 2017 same-store revenue guidance from Camden Property Trust CPT, Equity Residential EQR and UDR, Inc. UDR; room for valuation expansion; and indications of supply pipeline easing in late 2018/2019 would help multifamily REITs, Yulico said. (See Yulico's track record here.)
Investors will rotate into multifamily's stable growth profile, the analyst said.
See also: How To Start Investing In Real Estate
"We view AVB to be well-positioned because of highest FFO growth in MF (7% avg in '18- 20E) and raised our development assumptions," Yulico said of his top pick in the multifamily subsector.
Valuations of shopping centers look attractive after underperforming in 2017, Yulico said.
UBS said it favored Federal Realty's portfolio because of its strong demographics and minimal top tenant downsizing risk. The company will hit the high end of 2018 FFO guidance range, Yulico said. Morgan Stanley raised its re-leasing spread assumptions for Federal Realty in 2018-2020. This, according to UBS, will drive 3-year average FFO growth of 6.7 percent.
The Price Action
At the time of writing:
• AvlonBay shares were up 0.55 percent at $187.72.
• Federal Realty was rallying 1.32 percent at $130.57.
• Kilroy shares were up 0.22 percent at $74.35.
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