Wells Fargo: 27 Stocks To Play Real Estate In 2018

With recovery in retail and favorable legislative circumstances, Wells Fargo expects real estate investment trusts to generate 4.5- to 5-percent returns to match next year’s single-digit returns in the S&P 500.

The trend is seen to drive 27 winners across real estate and other exposed industries.

The Rating

• Wells Fargo analyst Jeffrey Donnelly recommends the following stocks by subsector:
• Regional malls: Macerich Co MAC;
• Net lease: Realty Income Corp O, National Retail Properties, Inc. NNN and Agree Realty Corporation ADC;
• Manufactured housing: Sun Communities Inc SUI and Equity Lifestyle Properties, Inc. ELS;
• Single-family home: Invitation Homes Inc INVH;
• Outdoor: Outfront Media Inc OUT;
• Data centers: Equinix, Inc. EQIX and CyrusOne Inc CONE;
• Towers: Crown Castle International Corp. (REIT) CCI;
• Multifamily: Apartment Investment and Management Co AIV;
• Shopping centers: Brixmor Property Group Inc BRX, Federal Realty Investment Trust FRT and Regency Centers Corp REG;
• Lodging: Host Hotels and Resorts Inc HST, Ryman Hospitality Properties, Inc. (REIT) RHP and Hyatt Hotels Corporation H;
• Self-storage: Extra Space Storage, Inc. EXR and National Storage Affiliates Trust NSA;
• Office: Paramount Group Inc PGRE and Kilroy Realty Corp KRC;
• Industrial: DCT Industrial Trust Inc DCT and Liberty Property Trust LPT;
• Health care: Healthcare Trust Of America Inc HTA, Healthcare Realty Trust Inc HR and CareTrust REIT Inc CTRE.

The Thesis

REITs could benefit from tax bills if Congress lowers ordinary dividends from 39.6 percent to between 25 to 29.5 percent, Donnelly said. (See the analyst's track record here.)

But such gains could be offset by modest declines in commercial property values driven by a rise in capitalization rates, he said. 

“Subsector performance should remain ‘choppy’ with sectors likely swapping positions several times throughout the year depending on confidence in the U.S. outlook, economic policy and interest rate picture,” the analyst said. “Accordingly, we expect stock selection will trump sector selection in 2018.”

Wells Fargo upgraded both regional malls and net lease subsectors to Overweight as retail recovers, store closures slow and mall mergers play out. Multifamily housing and shopping centers were downgraded to Market Weight in anticipation of comps deceleration in both and big-box store reduction in the latter.

Wells Fargo maintained Overweight ratings on five real estate subsectors, Market Weight ratings on two and Underweight ratings on three. 

Price Action

iShares US Real Estate ETF IYR closed down 2 percent Tuesday at a rate of $80.45.

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