Rising mortgage rates and high prices are weighing on sales of existing homes. The National Association of Realtors (NAR) on Tuesday reported that home prices in May were up 14.8% year over year to a record average of $407,600. Sales were lower for the fourth straight month, down 3.4% from April’s level and down 8.6% compared to May 2021. Home price growth has been forecast to rise in a range of 6.6% to 13.9% in 2022.
Renters may see an even bigger increase in housing costs this year. NAR has forecast rent prices to rise by 7.1% in 2022. In large part, that is due to a lack of rental housing. According to Harvard’s Joint Center for Housing Studies, in the third quarter of last year, the growth in occupied apartments outran new rental construction by nearly 250,000 units.
A team of Credit Suisse analysts led by Tayo Okusanya has initiated coverage on 25 U.S. real estate investment trusts (REITs) and named five top picks from among nine industry sectors. The team has an Overweight rating on the apartments, single-family rentals and towers sectors. Market Weight ratings were given to the data centers, shopping centers, health care, triple weight retail and mortgage sectors, and the single Underweight rating went to the office sector.
The analysts said that they expected most of the companies in the apartments sector to hit the high end of 2022 guidance or to raise guidance “given still attractive demand/supply fundamentals and home affordability remain a challenge, which supports rent and occupancy growth.” In the single-family rental sector, the same demand/supply fundamentals apply, but the analysts prefer multifamily sectors because single-family rentals remain more expensive and “are likely to have slower earnings growth over the next 12-24 months.” Credit Suisse sees the towers sector as a major beneficiary of the continued rollout of 5G network connectivity.
Here is a look at Credit Suisse’s top five REIT picks, listed in order of their potential upside to the current price of the stock.
WeWork Inc. (NYSE: WE) gets an Outperform rating from Credit Suisse and a price target of $11. At a share price of $5.00, the upside potential is 105.6%.
At one time in 2019, WeWork had a valuation of $47 billion. At the current price, its market cap is closer to $4 billion, and the story of how it got there is well-known and was recently the subject of a docuseries, “WeCrashed,” from Apple TV+. Here is how the Credit Suisse team sees the company now:
Attractive total addressable market for co-working industry, and market share gains vs traditional office should pave the way for positive FCF [free cash flow] by 2023, especially with growth in higher-margin products such as All Access and Workplace, along with an improved capital structure. The stock trades like a broken SPAC, even though it isn’t.
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American Tower Corp. (NYSE: AMT) owns, operates and develops multitenant communications towers. Credit Suisse rates the stock as Outperform with a price target of $313. At a share price of around $236, the upside potential is 32.5%.
Demand for 5G internet speeds and for places to mount 5G hardware should continue, the analysts say:
AMT is a major beneficiary of 5G rollout. Meanwhile, the recent CoreSite acquisition is less dilutive than expected and gives exposure to data centers segment, improving international churn dynamics and defensive cash flows, in a market of increasing uncertainty/volatility. There also remains potential upside from acquisitions (e.g. New Zealand).
Ventas Inc. (NYSE: VTR) is a health care facility REIT with some 1,200 properties. Credit Suisse has given this stock an Outperform rating and a price target of $63. At a share price of around $49, the upside potential is 28.6%.
Credit Suisse touted the company’s senior housing operating portfolio (SHOP), commenting that “SHOP recovery should be a significant driver of earnings growth over the next 12- 48 months.”
NexPoint Residential Trust
NexPoint Residential Trust Inc. (NYSE: NXRT) acquires, owns and operates “well-located” multifamily properties for middle-income families in large cities and suburbs located primarily in the U.S. Southwest and Southeast. The stock was given an Outperform rating and a price target of $72. At a share price of around $59, the potential upside on the shares is 21.7%.
Credit Suisse likes the location of this apartment REIT in the U.S. sunbelt:
Exposure to the attractive combination of Sunbelt markets and workforce housing, combined with a highly profitable remodeling pipeline, suggests NXRT continues to lead the sector in regards to SS NOI [same store net operating income] as well as FFO/sh [funds from operation per share] growth.
SS NOI was up 16.4% year over year in the March quarter and FFO/sh rose from $0.55 to $0.74 per diluted share year over year.
Brixmor Property Group Inc. (NYSE: BRX) owns and operates 395 U.S. open-air shopping centers. Credit Suisse’s analysts have an Outperform rating on the stock with a $23 price target. At a share price of around $20, the potential upside is 16.6%.
In a comment on the stock, the analysts note:
Years of portfolio repositioning should continue to bear fruit in the form of attractive mark to market on both new and renewal leasing, with [the added benefit of] potential upside from [new leases to small shop owners].
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