Needless to say, with the lowest interest rates since 2016, and a very bloated and fully valued stock market, many investors are struggling to find investment options that make sense now. One thing is for sure: interest rates are going nowhere for the foreseeable future, and they stand a very good chance of going lower this fall, as two more interest rate cuts could be in the cards.
In a new Jefferies research report, equity strategist Steven DeSanctis shifts his rating on the real estate sector to Overweight from Underweight. He notes this in the report:
The sector tends to outperform when the Fed cuts rates, earnings growth has been solid, the sector is inversely correlated with the VIX, has seen weaker ETF flows to date and is still under owned by Small and Mid cap managers.
The Jefferies team also had 10 top reasons for owning the sector now.
- The correlation between the 10-year Treasury and relative performance stands at −0.3.
- When the Federal Reserve has cut rates in the past, real estate gets out to a slow start but relative performance picks up and the group has outperformed.
- Volatility continues to rise and the sector is inversely correlated with the VIX index.
- If investors want to be domestically focused and not worry about trade wars, this is the sector to be in. On average, less than 5% of revenue comes from outside the United States.
- Earnings growth has been solid for this sector with fewer swings.
- Yes, valuations are expensive on an absolute and relative basis, but again, with rates this low, valuations for the group should be higher.
- The spread in dividend yield versus 10-year Treasury stands at 2.0%, above the average of 1.4%.
- Exchange-traded fund (ETF) flows have NOT been off the charts strong and could pick up, along with money continuing to move into low volatility, and this creates a tailwind for the sector.
- It is still an underowned sector by small-cap value managers.
- Malls are still a big chunk, but weight has fallen and is less impactful on sector.
In addition, Jefferies real estate analyst Jon Peterson has five favorite picks in the sector, all of which the firm rates at Buy.
Corporate Office Properties
The increased spending from the U.S. Department of Defense could prove to be a huge boon for this company. Corporate Office Properties Trust (NYSE: OFC) is a leading owner and developer of high-security office buildings and data centers leased to government and contractor tenants.
Its portfolio is clustered around the largest defense-information technology installations for the U.S. government in Maryland, Virginia, Alabama and Texas. The company also owns a portfolio of traditional office assets in Virginia, Maryland and Washington, D.C., with a concentration in central business district in Baltimore.
Investors receive a solid 3.81% distribution. The Jefferies price objective for the shares is $34, and the Wall Street consensus target is $29.18. The shares closed Thursday’s trading at $28.85 apiece.
Nexpoint Residential Trust
This real estate investment trust (REIT) has shown very solid growth metrics and is reasonably priced. Nexpoint Residential Trust (NYSE: NXRT) engages in the acquisition, management and disposition of multifamily assets. It also focuses on providing lifestyle amenities and upgraded living spaces to low- and moderate-income renters in the southeastern United States and Texas.