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Mizuho analyst prefers strip centers to malls, but both are 'wait-and-see'

Real estate investment trusts should have a solid year in 2020, but there will be more struggles in retail, particularly in malls, a senior REIT analyst said.

Mizuho Securities USA's Haendel St. Juste made a handful of rating changes as he forecast an 8% to 10% total return for REITs in 2020 amid generally favorable economic conditions.

St. Juste downgraded Brandywine Realty Trust, Douglas Emmett Inc. and Mid-America Apartment Communities Inc. to neutral from buy and mall landlord Macerich Co. to underperform from neutral.

He upgraded AvalonBay Communities Inc., Hudson Pacific Properties Inc. and Realty Income Corp. to buy from neutral.

The analyst's top picks for the year are Alexandria Real Estate Equities Inc. in office, Welltower Inc. and Omega Healthcare Investors Inc. in healthcare, Realty Income in net lease, AvalonBay in multifamily, and American Homes 4 Rent in single-family rental.

St. Juste does not have a single recommendation in retail, but he said in an interview that he is more "constructive" on strip centers than malls. Strip landlords will still have to deal with retailer tenant bankruptcies and store closures, but their balance sheets are generally cleaner so they will be better able to manage the disruption. They do not have the same anchor-replacement problems, either.

"Concerns over store closures and guidance still suggests they could be at risk into earnings over the next couple of weeks, so we're not pounding the table on shopping centers, but [we're] a lot more constructive," St. Juste told S&P Global Market Intelligence.

SITE Centers Corp. is the REIT with the most exposure to ailing retailers, he said, advocating a wait-and-see stance with even the cleanest, most promising retail REIT names like Simon Property Group Inc. against the backdrop of uncertainty around guidance and how the generally "disappointing" holiday sales season will impact store closure count.

"No need to be a hero and invest certainly not in malls — yet," he said. "Why jump out ahead of earnings guidance, store closures, news and just the general uncertainty?"

For 2020, St. Juste is overweight on industrial, healthcare, multifamily, single-family rental and triple net lease; is neutral on shopping centers; and is underweight on malls and office.