Real estate investment trusts took a beating in 2016 when it started to become clear that the Federal Reserve was intent on raising interest rates. But many analysts think REITs deserve another look now as the economy looks set to continue expanding slowly and steadily but rates have remained subdued.
There's just one caveat: the retail landscape continues to be a bloodbath, with more and more retailers announcing store closures, prompting discussion of “zombie malls” and hitting the bonds that benefit from their income streams.
Here, then, are some REIT plays that avoid the retail apocalypse.
Industrial REITS are one investment play that may actually profit as online retailers like /zigman2/quotes/210331248/composite AMZN -0.45% lay waste to brick and mortar stores. These investments are mostly made up of distribution centers and warehouses, though they may also have some exposure to factories or manufacturing facilities.
“We like what we see in the U.S. industrial sector with demand exceeding GDP growth, manageable levels of new supply, and a powerful/unique ‘hook’ as retail sales increasingly shift online,” wrote Mizuho analysts in a recent note. Among Mizuho’s top picks in the sector is Duke Realty /zigman2/quotes/200302802/composite DRE +0.66% , which reported last quarter that it had signed three leases with Amazon for a total of 1.8 million square feet.
Analysts at SunTrust Robinson like First Industrial Realty Trust /zigman2/quotes/200364537/composite FR +0.47% , calling it less expensive than its peers, with a strong balance sheet and a broad footprint that spans many markets. The stock has declined about 1.6% since the start of the year, but is up about 10% since hitting a low in late January.
Prisons are another sector that looks set to catapult higher, multiple analysts believe. As Canaccord Genuity analysts wrote in a recent note, the sector is “entering a sustained period of pro-private, tough-on-crime policies alongside comprehensive immigration reform.” SunTrust Robinson agrees.
Both firms like Core Civic /zigman2/quotes/200590180/composite CXW +2.91% , although Cannacord notes that the company is losing one federal contract at a Texas facility. Core Civic management guided higher when it reported earnings last quarter. The stock is up 33% since the start of the year. Another analyst favorite is the Geo Group /zigman2/quotes/209855552/composite GEO +2.14% , which trades at a discount to the rest of the REIT sector and offers a 6% dividend yield.
Equity analysts also agree that there’s room for growth in housing REITs, though there’s some disagreement on which strategy is best.
Mizuho is bullish on single-family rentals, believing that many of the macro trends that have allowed the industry to blossom will continue. Household formations are rising, but tighter mortgage credit and other personal finance challenges like student debt are keeping a lid on ownership.
The risks for multi-family REITs, they write, include “the possibility of the Trump administration making changes to boost the for-sale housing market (i.e. bad for the rental market)” but mostly it’s the overbuilding that’s gone on in the past few years. Their favorite single-family REIT is Colony Starwood a stock that’s up 19% this year.
In contrast, SunTrust Robinson thinks apartment REITs have already seen enough of a correction and are likely to bounce back. One of their favorite stocks in this area, Mid-America Apartment Communities /zigman2/quotes/209821465/composite MAA +0.63% , has four buy ratings among analysts polled by FactSet.
The analysts forecast higher net operating income for single-family REITS than multi-family or even all REITS, and 16% earnings growth for the group, compared to 3% for multi-family.