Credit Suisse analyst Tayo Okusanya named American Tower (NYSE:AMT), WeWork (NYSE:WE), Ventas (NYSE:VTR), Brixmor Property Group (NYSE:BRX), and NexPoint Residential Trust (NYSE:NXRT) as his top five picks in REIT and real estate operating company coverage.
"We believe all of our top picks are poised to benefit from a combination of technological innovation (e.g., 5G), industry disruption (e.g., hybrid work and co-working adoption), aging demographic trends, and overall migration trends," the analyst wrote in a note to clients.
On Thursday, the analyst added new coverage on 24 REIT stocks and one real estate operating company, bringing its REIT coverage to a total of 78 REITs and REOCs.
Credit Suisse is overweight on apartment, single family for rent, and tower REITs, underweight on office REITs, and market weight on healthcare, data centers, shopping centers, triple net retail, and mortgage.
"We believe the impact of rising rates (a negative for REITs) will be partially offset by inflation protection offered by REITs," Okusanya said.
In the new coverage, he expects tech- and biotech-focused names to underperform. Essex Property Trust (ESS), Kilroy Realty (KRC), and Hudson Pacific Properties (HPP) get Underperform ratings, as all three "have meaningful exposure to markets heavily exposed to technology and biotechnology, where we expect a slowdown in demand," he wrote.
National Health Investors (NHI) is rated Underperform on tenant credit risk concerns.
On a more general overview, rising rates will create a drag on REIT earnings and valuations due to variable rate debt costs rising and higher debt refinancing costs; weaker investment spreads which are likely to reduce acquisition activity; higher cap rates pressuring net asset values; and higher discount rate on expected future cash flows, Okusanya explained.
In REITs' favor, annual rent escalators in leases act as a natural inflation hedge, however, the escalators are often capped in the 2%-4% range which lags current inflation rate of 8.5%. Short lease duration stocks typically fare well as they're able to reprice portfolios faster.
While Okusanya is bullish on American Tower (AMT), WeWork (WE), Ventas (VTR), Brixmor Property (BRX), and NexPoint Residential (NXRT), Seeking Alpha's quant system, which has consistently outperformed the market, has bearish views of WE, VTR, and NXRT, as seen here. Of the five stocks, Brixmor screens the best by quant factor grades.