3 Top Picks Emerge From Citigroup's Overall Bullish Outlook For REITs

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Last week, Citigroup published a 100-page research report looking back at 1H 2015 REIT performance and forecasting how real estate investment trusts (REITs) are likely going to perform moving forward. The rate "tug-of-war" shown in the chart below, provided the backdrop for a brief bear case REIT discussion, including: supply concerns, slower growth and capital market risks. During the past two years, REIT performance has been highly correlated to moves in the 10-Year Treasury note yield.
However, strong REIT fundamentals and many REIT shares trading below NAV helped contribute to an overall bullish Citi view for REITs -- with aggregate total returns for the next 12 months projected at 10 to 15 percent. REIT dividend yields were expected to account for 3.9 percent on average, with the balance either attributed to growth in AFFO, or increases in NAV.

REITs Are Not Bonds

While noting that potential interest rate headwinds and adverse capital market trends could pose a bearish threat to the forecast; Citi also pointed out that six out of past eight instances when the 10-Yr Treasury increased by 100 bps or more, REIT shares actually responded with positive results. This underscores how REITs can perform well in rising rate environment, (unlike static return bonds), by realizing FFO growth through operations, refinancing, and accretive acquisitions.

Citi Look Back At First 6 Months - 2015

The chart below highlights the economic events most closely tied to REIT performance from January 1 through the end of June 2015.
Notable economic events included: the price of oil, foreign exchange, FOMC and Fed Chair comments, U.S. GDP, rising bond yields and Greece.
Citi - Property Sector Views
  • Overweight: Class-A malls, urban office, apartments, lodging, student housing and industrial.
  • Market Weight: Diversified, lab office, shopping centers.
  • Underweight: Manufactured homes, storage, data centers, healthcare, net lease and specialty.
  • Citi - 3 Top Picks Upgraded To Buy On July 1, Citi Research also released a research note upgrading six REITs from Neutral to Buy, for a total of 16 Buy-rated REITs under coverage. Based upon highest expected total return for the next 12 months, here are the top three Citi REIT upgrades:
    • Kimco Realty KIM $9.6 billion cap, 4.14 percent yield, (shopping center).
    • Acadia Realty Trust AKR $2.1 billion cap, 3.15 percent yield, (shopping center, street retail).
    • EastGroup Properties EGP $1.9 billion cap, 4 percent yield, (industrial/flex space).

    Tale Of The Tape - Past 5 Years

    During the first half of 2015 Kimco, Acadia and EastGroup shares were down 4.8 percent, 5.7 percent and 9.1 percent, respectively. Citi - Kimco: Upgrade To Buy, $27 PT (Unchanged)
    • The Kimco target price of $27 represents a ~20 percent upside from its July 1, close of $22.50 per share.
    • Citi noted that KIM had been trading at an 11 percent discount to its NAV estimate; and views the December investor day and passing of the baton to new CEO Connor Flynn as potential catalysts for the shares.
    Citi - Acadia: Upgrade To Buy, $34 PT (Unchanged)
    • The Acadia target price of $34 represents a ~15.75 percent upside from its July 1, close of $29.37 per share.
    • Citi views AKR trading 5 percent below NAV to be a rare opportunity to buy AKR shares which normally trade at an 11 percent NAV premium.
    • Citi noted Acadia's strong balance sheet, its ~50 percent urban and street retail portfolio, current development pipeline and projected managed fund promotes as rationale.
    Citi - EastGroup: Upgrade To Buy, $65 PT (Unchanged)
    • The EastGroup target price of $65 represents a ~15.3 percent upside from its July 1, close of $56.37 per share.
    • Citi noted that EastGroup has been beaten up over large, (~20 percent), Houston portfolio exposure and CEO transition; and is currently trading at a 10 percent discount to NAV.
    • EastGroup's strong balance sheet, potential $500 million development pipeline, and Sunbelt portfolio of assets all support Citi's higher-than-consensus Buy rating.
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Posted In: Analyst ColorLong IdeasREITDividendsTop StoriesTrading IdeasReal EstateCitigroupMichael Bilerman
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