Investors looking to get in on the recent rise in real estate stocks should focus on quality, according to Bank of America. The real estate sector of the S & P 500 has been moving higher over the past month or so and is now up 10% year to date, after being in the red earlier this year. The sector hit a 52-week high last week. Real estate investment trusts are also an income play, often paying out attractive dividends. “Stocks with healthy yields become increasingly attractive in a Fed cutting environment,” Jill Carey Hall, an equity and quant strategist at the bank, wrote in a Sept. 9 note that focused on small-cap and midcap REITs. Her work with small-cap and midcap stocks also suggests that dividend yield is the best factor to hedge cycle risk, she added. .SPLRCR YTD mountain S & P 500 Real Estate Sector The Federal Reserve started its rate-cutting cycle last week, slashing the federal funds rate by 50 basis points. The central bank also indicated another 50 basis points of cuts by the end of the year. In this environment, Bank of America likes health care, residential and retail REITs. Health-care real estate is a play on the aging of America , which will see more people seeking medical services and senior housing, Hall said. Residential REITs continue to see demand given housing affordability issues and a majority of retail REITs have beat and raised guidance, she added. When it comes to choosing specific stocks, analyst Jeffrey Spector, the bank’s head of U.S. REITs, suggests looking at names with quality growth, quality value and — with the anticipation of a soft-landing scenario — quality risk. “Higher quality REITs will offer the best earnings and distribution growth,” he wrote in the same note. Quality REITs have resilient pricing power, multiyear earnings visibility based on secular growth drivers, strong and flexible balance sheets and the highest prospect for global inflows. Here are some of the names that made Spector’s top picks list. Welltower is the only large-cap stock that made the cut. The rest are small-cap and midcap REITs. Welltower owns and develops senior housing, skilled nursing/post-acute care facilities and medical office buildings. Near term, Welltower will benefit the most from accelerating occupancy gains amid the post-Covid recovery, Bank of America believes. “In addition, we believe senior housing rate growth will remain robust in 2024 & beyond. WELL has the highest exposure to senior housing operating assets within our coverage universe and based on our demographic analysis has the best positioned portfolio,” the bank said. “Longer term, demographic trends are favorable as baby boomers continue to age.” Shares of Welltower are up 40% year to date. Mid-America Apartment Communities and American Homes 4 Rent are both residential housing plays. The former is a multifamily REIT that operates in communities across the Sunbelt region, where the bank sees robust job growth and a lower cost of living. The latter owns the second-largest single-family rental REIT portfolio in the U.S., Spector wrote. “We remain positive on AMH’s portfolio, limited new supply of single-family homes, structural demographic tailwinds with aging millennials, accretive consolidation/development opportunities, and a strong management,” he said. Mid-America Apartment Communities has gained nearly 18% year to date, while American Homes 4 Rent is up close to 7%. Lastly, Federal Realty Investment Trust owns, operates and develops retail-based properties in coastal markets. Spector said this “blue-chip retail REIT” has a diverse portfolio of shopping centers and should produce growth above its peers in the long term. The stock has moved more than 9% higher so far this year.
Tag: American Homes 4 Rent REIT Class A
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How Wall Street’s REIT giants are reshaping U.S. real estate
U.S real estate investment trusts today manage $4.5 trillion in real estate worldwide. Many groups on Wall Street offer these tax-friendly funds to retail investors.
KKR’s real estate business is one of the big players in the REIT game. The private equity firm manages multiple REIT funds. The KKR Real Estate Select Trust, which currently manages $1.5 billion in assets, paid a dividend of 5.4% to its investors in July 2023.
But the benefits extend beyond returns.
“When you look at the after tax equivalent of that yield, it is very compelling.” said Billy Butcher, CEO of KKR’s global real estate business. “The depreciation from our properties has covered 100% of the income generated by our properties, and there’s no tax on that dividend,” he said in an interview with CNBC.
Larger funds sometimes contain a diversified pool of assets. Categories may include office, student housing, casino, timberlands, radio and cell towers, server farms, self-storage properties, billboards, and much more.
“Back in the 1960s, there were three or four different types [of REITs], said Sher Hafeez, a managing director at Jones Lang LaSalle, a real estate services firm. “Now, I can count at least 20 different types.”
Top performing REIT sub-sectors in recent years include data centers, self-storage properties, residential housing and tower REITs. Residential housing delivered a return of 16% from 2010 to 2020, according to a S&P Global Investments report.
The investor-friendly tax rules can also increase the pace of large-scale development.
“Having REITs there as a potential exit helps the market, and helps the availability of financing,” said Michael Pestronk, CEO and co-founder of Post Brothers, a Philadelphia-based housing developer.
Some funds like Invitation Homes and American Homes 4 Rent were founded in the yearslong slowdown in U.S. home construction. At the time, REITs bought and managed commercial-scale properties, which could include products like master-planned communities or traditional apartment complexes.
In recent years, publicly traded trusts have targeted single-family rental market, and today, these REITs have grown tremendously — enough to build new neighborhoods in their entirety.
Watch the video above to learn the fundamentals of real estate investment trusts.
