Investors have had a rough go of it so far this year, and the setup for the next month or so, and perhaps beyond, looks grim. Since 2008 and the historic market collapse, the Federal Reserve has time and again bailed out the equity markets by keeping interest rates abnormally low and engaging in quantitative easing to make sure rates stayed low. However, that gambit is over, as the Fed has painted itself into a corner and inflation is at the highest level in 40 years.
The kind of volatility we saw this week is very telling. Monday’s final hour rally was probably a combination of quick trading algorithms and short covering. The same is true on Tuesday, to some degree. The bottom line for investors worried about rising interest rates is that, even if the central bank raises rates four times this year and next, we are looking at a federal funds rate of probably 2.0% to 2.5%. On a historical basis, that is still incredibly low, especially compared to the 5.25% rate in 2007.
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Historically, real estate investment trusts (REITs) do not respond well to rate increases. Yet, with staggering inflation, real estate and hard assets are in demand now. A new Raymond James research report highlights the top picks in the firm’s REIT universe. It said this when discussing rate increases and their effect on the industry:
The only major sector fundamental pushback (versus. the macro pushback: rates/inflation) was continued cap rate compression which is impacting investing spreads. The good news is investing spreads have been above long-term averages for the past several years, providing some cushion for increasing interest rates and compressing cap rates. Based on the company updates received thus far in January, cap rates continued to compress in the fourth quarter for assets leased to both investment grade and non-rated/BIG tenants.
We screened the Raymond James list and found one stock rated Strong Buy and four that are Outperform rated. They all pay outstanding distributions to shareholders. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Agree Realty
This top REIT has backed up since printing highs last summer and has big potential upside. Agree Realty Corp. (NYSE: ADC) is primarily engaged in the acquisition and development of properties net leased to industry-leading retail tenants. As of September 30, 2020, the company owned and operated a portfolio of 1,027 properties, located in 45 states and containing approximately 21.0 million square feet of gross leasable area.
The Raymond James team is very positive and noted this in the report:
Looking forward to 2022, Agree announced full-year acquisition guidance of $1.1-1.3 billion (just below our $1.4 billion assumption, though we would highlight Agree’s track record of raising/exceeding its acquisition goalposts). Turning to dispositions, Agree expects to sell between $25-75 million of assets in 2022.
Investors receive a monthly 4.20% distribution. The Strong Buy rating comes with an $82 price target. The consensus is $80, and the shares traded early Wednesday at $65.55.
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