We have all heard it over and over: the bond proxy arena is way overbought and could be vulnerable to rate increases. The fact of the matter is that while utilities and telecoms are way overbought, and overweighted by many portfolio managers, real estate investment trusts (REITs), according to Jefferies, are not. In fact, the average manager is 3.3% underweight REITs, and each 1% increase in weight represents $46.7 billion in buying pressure. With real estate now its own sector, based on the S&P Global Industry Classification Standard, managers may be forced to buy.
A new Jefferies report, while acknowledging that REITs are pricey, sees continued low rates and the new industry classification as a significant tailwind for the group. It also points out that since 1979 the group has gained a very solid gain of 12.9% annually, based on total return, which is much better than the Russell 3000’s rise of 11.6%, and even better than the small caps.
We screened the stocks rated Buy in the firm’s REIT coverage universe and found four top yielding names that make sense for income accounts.
Digital Realty Trust
This stock may be a solid play for more conservative accounts. Digital Realty Trust Inc. (NYSE: DLR) supports the data center and colocation strategies of more than 600 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia.
Digital Realty’s clients include domestic and international companies of all sizes, ranging from financial services, cloud and information technology services, to manufacturing, energy, gaming, life sciences and consumer products. The company rates highly with portfolio managers, as a large part of the market cap of the company is in institutional hands.
The company reported strong second-quarter numbers that were ahead of expectations. Last year, Digital Realty bought Telx, a national provider of data center colocation, interconnection and cloud enablement solutions back in a $1.89 billion deal, and the acquisition is expected to close this month. The combination is expected to double Digital Realty’s footprint in the rapidly growing colocation business, as well as to provide Digital Realty customers access to a leading interconnection platform.
Digital Realty investors are paid a 3.55% distribution. The Jefferies price target for the stock is $104, and the Wall Street consensus target is $108.29. The shares closed Wednesday at $99.09.
Extra Space Storage
This top REIT resides on the analyst’s Top Picks list. Extra Space Storage Inc. (NYSE: EXR) owns or operates 1,088 self-storage properties in 35 states, Washington, D.C., and Puerto Rico. Its properties comprise approximately 725,000 units and approximately 80.4 million square feet of rentable storage space, offering customers conveniently located and secure storage solutions across the country, including boat storage, RV storage and business storage. The company is the second largest owner or operator of self-storage properties in the United States, and it is the largest self-storage management company in the country.