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REIT And Lodging Small/Midcaps Could Be Poised For A Good Year

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“Real Estate has been the worst performing Russell 2000 (INDEXRUSSELL:RUT) industry group so far in the second half, and we view better performance in 2014 as key to our style box preference for Value, given the index’s large Financials weight,” say Citi analysts Scott T Chronert and Louis L Odette in their recent research note “SMID Cap Rap – The Gift That Keeps Giving.”

Their note includes a focus piece on analyst Michael Bilerman’s REIT and Lodging outlook.

Interest hiccups only temporary for REITs

The analyst is “more bullish than bearish” on REITs, and points that a host of them now trade at attractive discounts to their NAVs. Rising interest rates are a negative for real estate and post-taper expectations are accordingly reflecting pressure on asset prices down the line – which Bilerman is in agreement with.

On the flip side, however, he views this interest related downturn in REIT prices as only a temporary phenomenon, soon to be ameliorated by the benefits brought about by a reviving economy. An improving economy brings with it glad tidings for the commercial real estate market in the way of demand for accommodation, higher rents and easier availability of capital.

New phase: Real estate cycle

According to Scott Crowe, Global Portfolio Manager, Resource Estate, the sector is moving into Phase II of the real estate cycle shown below:

1-cycle REITs

He says another positive factor carried over from the Stabilization Phase is the limited new construction coming on the market, which is a positive for the Growth Phase.

“The expectation of higher interest rates should create an adjustment phase in the real estate cycle. We have already seen this in listed REITs which, because of their greater liquidity, respond more quickly to events and are now trading at a 15% discount to NAV. We believe this is an attractive entry point for total return investors,” says Crowe.

At Citi, Bilerman expects total returns in 2014 between 5 to 10% based on dividends and improving NAVs /cash flows.

Sectors to embrace…and the ones to avoid

Bilerman recommends malls, multifamily, CBD office and lodging. Stay clear of healthcare, net lease, suburban office, shopping centers and self-storage, he says.

Recommended stocks:

Post Properties Inc (NYSE:PPS)

Equity Lifestyle Properties, Inc. (NYSE:ELS)

Home Properties, Inc. (NYSE:HME)

LaSalle Hotel Properties (NYSE:LHO)

Tanger Factory Outlet Centers Inc. (NYSE:SKT)

Douglas Emmett, Inc. (NYSE:DEI)

Alexandria Real Estate Equities Inc. (NYSE:ARE)

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