With recovery in retail and favorable legislative circumstances, Wells Fargo expects real estate investment trusts to generate 4.5- to 5-percent returns to match next year’s single-digit returns in the S&P 500.
The trend is seen to drive 27 winners across real estate and other exposed industries.
- Wells Fargo analyst Jeffrey Donnelly recommends the following stocks by subsector:
- Regional malls: Macerich Co (NYSE: MAC);
- Net lease: Realty Income Corp (NYSE: O), National Retail Properties, Inc. (NYSE: NNN) and Agree Realty Corporation (NYSE: ADC);
- Manufactured housing: Sun Communities Inc (NYSE: SUI) and Equity Lifestyle Properties, Inc. (NYSE: ELS);
- Single-family home: Invitation Homes Inc (NYSE: INVH);
- Outdoor: Outfront Media Inc (NYSE: OUT);
- Data centers: Equinix, Inc. (NASDAQ: EQIX) and CyrusOne Inc (NASDAQ: CONE);
- Towers: Crown Castle International Corp. (REIT) (NYSE: CCI);
- Multifamily: Apartment Investment and Management Co (NYSE: AIV);
- Shopping centers: Brixmor Property Group Inc (NYSE: BRX), Federal Realty Investment Trust (NYSE: FRT) and Regency Centers Corp (NYSE: REG);
- Lodging: Host Hotels and Resorts Inc (NYSE: HST), Ryman Hospitality Properties, Inc. (REIT) (NYSE: RHP) and Hyatt Hotels Corporation (NYSE: H);
- Self-storage: Extra Space Storage, Inc. (NYSE: EXR) and National Storage Affiliates Trust (NYSE: NSA);
- Office: Paramount Group Inc (NYSE: PGRE) and Kilroy Realty Corp (NYSE: KRC);
- Industrial: DCT Industrial Trust Inc (NYSE: DCT) and Liberty Property Trust (NYSE: LPT);
- Health care: Healthcare Trust Of America Inc (NYSE: HTA), Healthcare Realty Trust Inc (NYSE: HR) and CareTrust REIT Inc (NASDAQ: CTRE).
REITs could benefit from tax bills if Congress lowers ordinary dividends from 39.6 percent to between 25 to 29.5 percent, Donnelly said. (See the analyst's track record here.)
But such gains could be offset by modest declines in commercial property values driven by a rise in capitalization rates, he said.
“Subsector performance should remain ‘choppy’ with sectors likely swapping positions several times throughout the year depending on confidence in the U.S. outlook, economic policy and interest rate picture,” the analyst said. “Accordingly, we expect stock selection will trump sector selection in 2018.”
Wells Fargo upgraded both regional malls and net lease subsectors to Overweight as retail recovers, store closures slow and mall mergers play out. Multifamily housing and shopping centers were downgraded to Market Weight in anticipation of comps deceleration in both and big-box store reduction in the latter.
Wells Fargo maintained Overweight ratings on five real estate subsectors, Market Weight ratings on two and Underweight ratings on three.
iShares US Real Estate ETF (NYSE: IYR) closed down 2 percent Tuesday at a rate of $80.45.
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