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BMO downgrades handful of retail, other REITs

BMO Capital Markets analysts downgraded several real estate investment trusts, including a handful of retail companies and some prominent large cap names like Simon Property Group Inc. and AvalonBay Communities Inc., while forecasting an implied 9.6% total return for the industry benchmark MSCI US REIT (RMZ) index for 2020.

Analysts John Kim and R. Jeremy Metz downgraded AvalonBay and Simon Property Group, along with Duke Realty Corp., Federal Realty Investment Trust and CareTrust REIT Inc., to "market perform" from "outperform," citing expectations for moderating fundamentals after a "surprisingly strong" 2019.

Simon Property Group remains a "winner" long term, they said, but the path to growth is foggy near term, as closing pressure in the weakened retail environment hampers earnings growth. The analysts expect retailer bankruptcies to slow in 2020 though they "will remain a prominent thorn in the side of landlords."

AvalonBay's 24.0% total return in 2019 meanwhile makes it a less attractive near-term play, they said.

The analysts also downgraded Brixmor Property Group Inc., CubeSmart, Franklin Street Properties Corp. and Macerich Co. to "underperform" from "market perform."

Overall, Kim and Metz expect data centers and manufactured housing, along with the office and industrial subsectors to outperform in the year ahead, as valuations "matter again" and some out-of-favor blue chip names regain some popularity as a result of their strong balance sheets and developments. They said New York office landlords like SL Green Realty Corp. and Vornado Realty Trust should climb "out of the doldrums" due to tech growth in the city and improved earnings outlooks. The analysts also said they see midstream energy as a potentially emerging REIT sector.

"In 2019, we believe investors in REITs were too heavily tilted towards secular themes and [same-store net operating income] growth," the analysts said. "We see more of a balance in 2020 between growth and value, with increased M&A a likely catalyst."

Kim and Metz named as top picks Camden Property Trust, Equity LifeStyle Properties Inc., Equinix Inc., Healthpeak Properties Inc., Prologis Inc. and Vornado.