The REIT analyst team from Robert W. Baird--David AuBuchon (Health Care, Office/Industrial), David Loeb (Hotel), Chris Lucas (Retail, Office, Industrial, Net Lease, Other), and Paula Poskon (Residential, Storage) -- yesterday published a sober, detailed "Real Estate 2011 Mid-Year Outlook." (I saw it in an SNL article by Zach Fox.)
Here are Baird's top individual picks:
- AvalonBay Communities (AVB): "With considerable portfolio exposure to high-barrier, high-growth markets and a peer-leading development pipeline, we see AVB as best positioned to capture growth as the economy recovers. The AVB shares are trading at a substantial premium to the peer group; we think a premium valuation is warranted given AVB's profile as a best-in-class player with an experienced management team, solid track record, and conservative balance sheet positioned to fund growth, particularly robust development."
- Cousins Properties (CUZ): "Our top pick in 2011 is still CUZ due to (1) our confidence in management's ability to close on acquisitions in markets with better fundamentals, (2) the company's ability to gain market share in leasing activity at specific assets, (3) a balance sheet now positioned to play offense, and (4) intermediate-term development opportunities that are underappreciated."
- InterContinental Hotels Group (IHG): "We believe the company's discounted valuation relative to peers provides an attractive value proposition."
- Corporate Office Properties Trust (OFC): "Valuation appears compelling as the shares trade at an implied 7.4% cap rate and at a modest 12% discount relative to peers compared to the seven-year average premium of 17%."
In addition, Baird recommended seven other "best ideas across all sectors":
- DuPont Fabros Technology (DFT): "Our investment thesis, that demand outstrips supply, remains intact for now with public companies the only enterprises capable of funding the huge capital required to develop wholesale data centers for lease to third parties."
- EastGroup Properties (EGP): "The company's external growth opportunities, solid balance sheet, ~5% dividend yield and reasonable valuation underscore our conviction in the stock."
- Education Realty Trust (EDR): "We remain confident in management's ability to capture both organic and external growth while prudently managing the balance sheet to fund that growth."
- Extra Space Storage (EXR): "We have long said that we view EXR's technology-based platform and attractive portfolio as well positioned to capture growth in the up-cycle as economic conditions improve."
- Federal Realty Investment Trust (FRT): "We expect the relative multiple premium to expand as the outlook for organic growth improves due to increasing occupancy but more importantly the nascent recovery in pricing power."
- Healthcare Realty Trust (HT): "Nearly 90% of HR's portfolio is exposed to the medical office building sector, our preferred healthcare property type."
- Host Hotels & Resorts (HST): "Host has the greatest access to capital and lowest cost of capital, and its under-levered balance sheet allows for additional investment capacity."
In terms of property sectors, Baird recommends "shorter least-term, cyclical sectors, including Apartments, Hotels, Industrial and Student Housing."
Apartments: Besides AvalonBay Communities there are 11 other publicly traded apartment REITs: Equity Residential (EQR), UDR (UDR), Camden Property Trust (CPT), Essex Property Trust (ESS), BRE Properties (BRE), Apartment Investment & Management (AIV), Mid-America Apartment Communities (MAA), Home Properties (HME), Post Properties (PPS), Colonial Properties Trust (CLP), and Associated Estates Realty (AEC). Baird's report says
We continue to recommend an over-weight allocation to the apartment sector, driven by expectations for a multi-year period of favorable fundamentals with no meaningful negative sector catalysts on the horizon. The apartment peer group has outperformed yeat-to-date, but we see no reason not to be invested in the sector, particularly for long-term investors.
Hotels: Besides InterContinental Hotels Group and Host Hotels & Resorts, there are 15 other publicly traded hotel REITs: Hospitality Properties Trust (HPT), LaSalle Hotel Properties (LHO), RLJ Lodging Trust (RLJ), Diamondrock Hospitality (DRH), Sunstone Hotel Investors (SHO), Strategic Hotels & Resorts (BEE), Pebblebrook Hotel Trust (PEB), Hersha Hospitality Trust (HT), Ashford Hospitality Trust (AHT), FelCor Lodging Trust (FCH), Chesapeake Lodging Trust (CHSP), Summit Hotel Properties (INN), Chatham Lodging Trust (CLDT), MHI Hospitality (MDH), and Supertel Hospitality (SPPR). According to Baird,
In 2011, shares of hotel companies have pulled back significantly and underperformed. Despite the pullback in share prices, the outlook for continued improvement in hotel fundamentals has remained strong and we now view current risk/reward attractively. With limited new supply, improving group trends, still-positive occupancy, and accelerating rate growth, the outlook for continued improvements in hotel fundamentals remains bright.
We continue to recommend an overweight allocation to the student housing sector based primarily on expected improved pricing power. Drivers of the student housing sector are growing enrollment trends, obsolescing existing product, and limited new construction constraining supply. As many schools continue to face budget cuts driven by state budget deficits, funding new on-campus housing is increasingly challenging.
Industrial: Besides EastGroup Properties there are seven other publicly traded industrial REITs: ProLogis (PLD), the company formed by the recent merger of ProLogis with AMB Property), DCT Industrial Trust (DCT), First Industrial Realty Trust (FR), First Potomac Realty Trust (FPO), Monmouth REIT (MNR), STAG Industrial (STIR), and Terreno Realty (TRNO). Baird reports that
Fundamentals still appear strong in the segment and the shorter lease term cycle should lead to quicker rent growth and the end of rent roll-downs assuming further economic expansion. We continue to favor the sector, noting that acquisition activity sill likely remain robust and further M&A activity could represent an upside catalyst. Industrial class A and B fundamentals continue to show improvement, despite soft economic results. Further, new supply has been below average since 2008. We believe this persistent lack of new supply, when coupled with recovering fundamentals, should lay the groundwork for solid market-wide rent growth.
Finally, Baird's report specifically addresses the current dividend yield on REITs:
REIT dividend yields remain 65 bps above the U.S. 10-year Treasury yield, perhaps providing patient investors with near-term yield and potential dividend growth (in light of historically low coverage levels) as they wait for the fundamental rebound to take shape. We continue to see mid-single-digit dividend growth as an attractive attribute on a relative basis, and one that could attract significant fund flows should interest rates remain low or fall further.
Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.
Disclosure: I am long Vanguard REIT Index Fund and ING Global Real Estate Fund.