KeyBanc's Guide To REITs In 2018: Expect 5-10% Returns

KeyBanc Capital Markets is evaluating the REIT sector's prospects at a time when the economic cycle is in its late stages.

REITs remain relatively well-positioned, with low leverage and payout ratios, dividends offering a nice premium to alternatives and rising rents offering inflation protection, KeyBanc analyst Jordan Sadler said in a Tuesday report. 

Demand for real estate is projected to remain steady, while new supply is ramping up in many subsectors, Sadler said. (See Sadler's track record here.)

With rent growth constrained by readily available development capital that has served to keep returns down, the analyst said cash flow growth has continued to moderate for REITs.

Modest AFFO Growth

KeyBanc now estimates less than 6 percent adjusted funds from operations, or AFFO, growth for 2018, with the year-over-year deceleration more pronounced in the data center, industrial and self-storage REITs. Lodging, healthcare and triple net sectors could see the slowest overall AFFO growth rates in 2018, Sadler said.

A Capital Market Boost

Notwithstanding the tapering core growth, KeyBanc said broader equities could benefit from strong earnings growth and a boost to animal spirits from the pending tax cut and looser regulation.

Looser standards along with a diminished commercial mortgage-backed securities debt maturity schedule could increase borrowing availability, tightening the credit spreads and offsetting some of the impact of rising base rates, Sadler said. 

KeyBanc expects to see M&A activity picking up in REITs that are trading at persistent discounts to private market value. Retail, office and certain hotel REITs could trade at big discounts to net asset value, the report said. 

5-10% Returns In 2018? 

KeyBanc said REITs are attractively valued relative to corporate bonds and equities, although the valuations are somewhat in line with their historic average valuations. The sector experienced multiple contraction in 2017, with only 6-percent AFFO growth and 2-percent price-only return, the firm said.

"We expect REITs to generate a 5-10 percent total return in 2018, driven by a 4-percent dividend yield and 6-percent AFFO growth, balanced by zero-to-5-percent multiple contraction," the firm said.

See also: 3 REITs To Get Bullish On In 2018

The Ratings

KeyBanc raised its recommendation for the office REIT sector from Sector Weight to Overweight, while it maintained an Overweight on industrial and data center REITs. For healthcare and self-storage REITs, the firm continues to recommend an Underweight weighting.

Here are KeyBanc's rating changes and price targets in the real estate sector. 


  • Brandywine Realty Trust BDN: Upgraded from Sector Weight to Overweight/$21
  • RLJ Lodging Trust RLJ: Upgraded to from Sector Weight to Overweight/$25
  • Healthcare Realty Trust Inc HR: Upgraded from Underweight to Sector Weight


  • DDR Corp DDR: Downgraded from Overweight to Sector Weight
  • National Health Investors Inc NHI: Downgraded from Sector Weight to Underweight

Best Ideas

  • Physicians Realty Trust DOC: Overweight
  • Hudson Pacific Properties Inc HPP: Overweight/$39
  • Prologis Inc PLD: Overweight/price target raised from $68 to $72
  • Camden Property Trust CPT: Overweight/$98
  • Macerich Co MAC: Overweight/$75
  • Retail Properties of America Inc RPAI: Overweight/$16
  • Digital Realty Trust, Inc. DLR: Overweight/$130

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Posted In: Jordan SadlerKeyBanc Capital MarketsReal EstateREITAnalyst ColorREITUpgradesDowngradesPrice TargetReiterationAnalyst RatingsReal Estate