Real estate stocks could outperform in a stagflationary environment.
Persistently elevated inflation and slowing economic growth have investors concerned about 1970s-era stagflation returning in 2022. The last time stagflation was a problem, real estate was a top-performing sector in the market. Bank of America recommends real estate investors focus on high-quality real estate investment trusts, or REITs, that have pricing power, strong and flexible balance sheets and inflation-protected cash flow. High-quality REITs also typically have clear, multiyear earnings visibility driven by secular growth trends, and they consistently beat earnings expectations and raise guidance. Here are Bank of America analyst Jeffrey Spector’s eight best real estate stocks to buy for 2022.
Alexandria Real Estate Equities Inc. (ticker: ARE)
Alexandria Real Estate Equities owns properties containing office and laboratory space for the life sciences industry. Alexandria is Spector’s top office REIT pick for 2022. He says the company’s properties are located in prime scientific research and development markets, including Boston, San Francisco, Washington D.C. and the Research Triangle in North Carolina. Spector says elevated research and development funding coupled with high demand for life sciences real estate position Alexandra favorably in an environment of inflation, rising interest rates and economic uncertainty. Alexandria also pays a 2.1% dividend. Bank of America has a “buy” rating and a $250 price target for ARE stock, which closed at $217.49 on Dec. 21.
Extra Space Storage Inc. (EXR)
Extra Space Storage is the second-largest U.S. self-storage REIT and is Spector’s top pick in the self-storage category. He is bullish on Extra Space’s elevated pricing power and high-quality balance sheet. Spector says the company has one of the best operating platforms among its peers and should deliver sector-leading growth in coming quarters. Record occupancy growth, healthy demand and lower supply should all be tail winds for Extra Space in 2022, Spector says. Extra Space pays a 2.3% dividend. Bank of America has a “buy” rating and a $250 price target for EXR stock, which closed at $215.73 on Dec. 21.
Invitation Homes Inc. (INVH)
Invitation Homes owns, operates and leases single-family U.S. homes and is Spector’s top single-family residential REIT pick. He says Invitation has scale advantages, is improving margins and has operating leverage for a recovering economy. He says the REIT has a high-quality portfolio, margin upside, a strong management team and external growth opportunities. Spector says Invitation Homes should generate healthy rent growth and projects rising U.S. incomes and healthy home pricing trends in 2022. The REIT also pays a 1.6% dividend. Bank of America has a “buy” rating and a $51 price target for INVH stock, which closed at $43.34 on Dec. 21.
Regency Centers Corp. (REG)
Regency Centers owns and operates shopping centers. Regency is Spector’s top retail REIT pick, and he says it has a best-in-class asset portfolio and balance sheet. Regency’s properties are primarily grocery-anchored shopping centers, and Spector says they benefit from strong tenancy and demographics. Regency’s balance sheet leverage is 5x, the lowest of all public open-air retail REITs. Spector says Regency should continue to benefit from retailers upgrading their store footprints and expanding into top-tier shopping centers. Regency also pays a 3.4% dividend. Bank of America has a “buy” rating and an $83 price target for REG stock, which closed at $72.93 on Dec. 21.
Rexford Industrial Realty Inc. (REXR)
Rexford Industrial Realty owns and operates industrial warehouse properties in Southern California infill markets. Rexford is Spector’s top industrial REIT pick. He says the Southern California infill warehouse market has a tight supply and strong demand, and Rexford is positioned to report the strongest internal growth in the sector in coming quarters. He is predicting earnings beats for the company through at least 2023. Finally, Spector says Rexford’s “fortress” balance sheet provides financial flexibility for property investment. Rexford also pays a 1.2% dividend. Bank of America has a “buy” rating and an $80 price target for REXR stock, which closed at $77.13 on Dec. 21.
Sun Communities Inc. (SUI)
Sun Communities owns and operates manufactured housing communities primarily in the U.S. Midwest and Southeast. Sun is Spector’s top manufactured housing REIT pick. He says the manufactured housing market has healthy fundamentals, and Sun has opportunities for attractive acquisitions. Spector says Sun’s manufactured homes, recreational vehicles and marinas segments are firing on all cylinders. He says Sun will expand further into international markets, and its new RV revenue management system will continue to drive growth in 2022. Sun also pays a 1.6% dividend. Bank of America has a “buy” rating and a $231 price target for SUI stock, which closed at $201.92 on Dec. 21.
UDR Inc. (UDR)
UDR owns more than 56,000 U.S. apartment units and is Spector’s top apartment REIT pick. Spector says UDR has a geographically diversified asset portfolio, an impressive operational platform and a respected management team. He says the company’s operating platform differentiates UDR from its peers and has enhanced the company’s controllable expense margins. Spector says the next phase of UDR’s operating initiatives could generate more than $100 million in incremental net operating income. UDR also has a 2.5% dividend. Bank of America has a “buy” rating and a $68 price target for UDR stock, which closed at $58.22 on Dec. 21.
Welltower Inc. (WELL)
Welltower owns and operates health care facilities, including senior housing care facilities and medical office buildings. Spector named Welltower his top health care REIT pick. He says the health care REIT market is recovering and should benefit from positive long-term demographic trends, including longer life expectancies and an aging baby boomer population. Spector projects senior housing rate growth will accelerate “sharply” in 2022 and says Welltower has the best positioned senior housing portfolio among REITs he covers. Welltower has a 2.9% dividend. Bank of America has a “buy” rating and a $95 price target for WELL stock, which closed at $82.64 on Dec. 21.
Best real estate stocks to buy:
— Alexandria Real Estate Equities Inc. (ARE)
— Extra Space Storage Inc. (EXR)
— Invitation Homes Inc. (INVH)
— Regency Centers Corp. (REG)
— Rexford Industrial Realty Inc. (REXR)
— Sun Communities Inc. (SUI)
— UDR Inc. (UDR)
— Welltower Inc. (WELL)
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