Deutsche Bank Weighs In On REITs - 4 Top Picks Prior To Earnings

Given the recent strong performance of the REIT sector, how can investors best to position themselves prior to Q4 2014 earnings reports? In a note dated January 26, Deutsche Bank analyst Vin Chao sheds some light on this question. Deutsche Bank - Big Picture The macroeconomic environment for 2015 continues to appear favorable for U.S. commercial real estate, highlights include: • U.S. GDP continues to accelerate. • Stable and growing U.S. job market. • Limited new supply (most sectors). • Global economic uncertainty is a downward driver for rates on U.S. 10-Year Treasury Notes, which in turn helps cash flows from U.S. commercial real estate. All of these factors combine to help create positive tailwinds moving forward for the REIT sector. Deutsche Bank - Valuation Concerns During 2014 REITs returned ~30 percent for investors, and YTD REIT shares have already jumped over 8 percent higher, while the broader market has been flat to lower. Against this backdrop, Deutsche Bank is less bullish on the REIT sector overall. Chao expects that there may be some profit taking as Q4 2014 earnings are reported, which may create buying selective buying opportunities for investors. • http://www.benzinga.com/trading-ideas/long-ideas/15/01/5148774/how-to-get-rich-slowly-in-the-reit-world Deutsche Bank - 4 Top Picks 1. In the shopping center space Brixmor Property Group BRX is the DB top pick, despite ~5 percent exposure to Houston, Texas. If lower oil prices and related job losses continue, this could become a headwind. However, energy prices should benefit power center anchors. DB maintains a Buy rating and increased its PT from $28 to $29. 2. Regional mall landlord General Growth Properties GGP is also a retail top pick, sporting a $27.45 billion cap. The recent drop in energy prices and strong holiday season sales will help offset some reported store closures and potentially difficult Y/Y comparisons due to high mall occupancy and leasing spreads in the mid to high teens during 2014. DB maintains a Buy rating and increased its PT from $31 to $33. 3. Data center REIT CyrusOne, Inc. CONE is the Deutche Bank top pick in this space, despite its ~30 percent exposure to the Houston market. DB noted that announced layoffs in the oil and gas services sectors are global, and that not all layoffs will be in Texas. Investors will need to pay close attention to the CONE conference call regarding this market segment. DB maintains a Buy rating and increased its PT from $31 to $35. 4. Single-tenant triple-net lease landlord Spirit Realty Capital SRC is also a top DB pick. However, it is notable that this is the only REIT DB covers in this sector). The SRC dividend yield is the highest of the DB top four, currently yielding 5.37 percent. DB maintains a Buy rating and increased its PT from $12.50 to $13. • http://www.benzinga.com/analyst-ratings/analyst-color/15/01/5144819/jefferies-weighs-in-on-best-data-center-reits-for-2015 Deutsche Bank - 2 Retail Downgrades 1. Shopping center REIT Retail Properties of America, Inc. RPAI was downgraded from Buy to Hold. DB noted that RPAI was "heavily exposed to our 'watchlist' of tenants…" which includes: Barnes & Noble, Best Buy, Office Depot, Staples and Rite Aid. DB maintained its PT at $18. 2. Shopping center REIT Ramco-Gershenson Properties Trust RPT was also downgraded by DB from Buy to Hold. DB noted that RPT was heavily geographically concentrated, with two-thirds of revenue from Michigan and Florida properties. DB increased its PT from $19 to $20. Deutsche Bank also noted that both of these REITs had executed on strategic initiatives and improved their balance sheets. The downgrades were primarily a function of valuation.