A team of analysts at Canada's Bank of Nova Scotia initiated coverage on the U.S. real estate investment trust sector with a positive total return outlook, citing reasonable valuations and stable fundamentals.
The analysts said that while the U.S. REIT sector has been "in the doldrums," they expect price appreciation of up to 5% for the sector over the next year and project 5% annual growth in funds from operations in 2018 to 2020.
In all, Nicholas Yulico, Trent Trujillo and Greg McGinniss launched coverage of 24 U.S. REITs in the core subsectors of office, industrial, retail and multifamily.
For the office REIT sector, the analysts expect West Coast markets to outperform their East Coast counterparts in 2019 and 2020 due to stronger leasing demand from technology and media tenants.
The analysts initiated Boston Properties Inc. and Kilroy Realty Corp. at "sector perform" with respective one-year target prices of $125.00 per share and $75.00 per share. Douglas Emmett Inc. and Hudson Pacific Properties Inc. were assigned a "sector outperform" rating, with respective per-share target prices of $42.00 and $36.00.
SL Green Realty Corp. was initiated at "sector outperform" and a one-year target price of $105.00 per share, while Vornado Realty Trust was assigned a "sector underperform" rating and a per-share target price of $69.00.
The analysts said they expect retail REITs to benefit from modestly increasing economic occupancy in 2019 and 2020. The analysts also said they believe that current valuations represent a buying opportunity in shopping centers, noting that they expect less mass closure risk in 2019. In terms of occupancy, the analysts expect lower risk to shopping centers than malls.
The analysts gave Simon Property Group Inc., Macerich Co., Regency Centers Corp. and Weingarten Realty Investors a "sector perform" rating, with respective per-share target prices of $177.00, $53.00, $66.00 and $29.50.
Brixmor Property Group Inc. and Federal Realty Investment Trust were assigned a "sector outperform" rating and per-share target prices of $18.00 and $132.00, respectively.
The analysts also assigned a "sector underperform" rating to Taubman Centers Inc., Kimco Realty Corp. and Tanger Factory Outlet Centers Inc., with respective per-share target prices of $54.00, $15.00 and $21.00.
For multifamily REITs, the analysts project improving rent growth in 2019 to 2020 due to easing supply threats, with the most notable same-store-revenue growth acceleration in coastal markets.
AvalonBay Communities Inc., Camden Property Trust, Mid-America Apartment Communities Inc. and UDR Inc. were initiated at a "sector perform" rating, with respective per-share target prices of $182.00, $95.00, $100.00 and $41.00.
Essex Property Trust Inc. and Equity Residential were assigned a "sector outperform" rating and per-share target prices of $265.00 and $70.00, respectively, while Apartment Investment and Management Co. got a "sector underperform" rating and a one-year target price of $43.00 per share.
For the industrial REIT sector, the analysts expect some natural slowing of rent growth and occupancy gains in 2019 to 2020 due to threats from higher new supply deliveries and the impact of tariffs on Chinese imports.
The analysts initiated Prologis Inc. and Duke Realty Corp. at a "sector perform" rating, with per-share target prices of $65.00 and $28.00, respectively.
Yulico is a former UBS Securities analyst who recently joined Scotiabank, while another former UBS Securities analyst, Ross Nussbaum, is now head of real estate investment banking at Scotiabank.