2 REIT Picks From Bank Of America

The Analyst

Bank of America Merrill Lynch's James Feldman upgraded two REIT stocks and downgraded one.

Alexandria Real Estate Equities Inc ARE and Cousins Properties Inc CUZ were upgraded from Neutral to Buy, while Corporate Office Properties Trust OFC was downgraded from Buy to Neutral. Feldman increased his price target for Alexandria Real Estate Equities from $133 to $141 and maintained the price target for Cousins Properties at $10. Feldman decreased the price target of Office Properties Trust from $39 to $33. (See Feldman's track record here.) 

The Thesis

The analyst said he expects Alexandria Real Estate Equities to outperform in 2018, as it still trades at the second best PEG and PEGY ratios in the office sector and has a 5-percent discount to Feldman's NAV. Feldman said he's most comfortable with this upgrade, because he already estimates above-average growth for the company in 2019. The key risk for Alexandria Real Estate Equities is the CEO transition, the analyst said. 

Feldman expects Cousins Properties' high quality sunbelt portfolio to benefit from outsized population and job growth in its markets. With 4.3 times net debt/EBITDA, the company has one of the strongest balance sheets among REITs, the analyst said. Cousins Properties is planning to sell its Miami and Orlando assets by the first quarter of 2018, with no plans to redeploy the capital, said Feldman. If it uses the capital for an acquisition, the analyst's 2018 FFO/share estimate is going to increase above consensus.

The previous Buy rating for Office Properties Trust was based on growing demand for the company's high security office space, due to pro-defense spending in the U.S., rising global military tensions and the use of cyberwarfare against the U.S. and corporations, Feldman said. He still expects that this scenario will play out, but estimates the earnings impact will take at least another year.

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