Investors looking to get in on the recent rise in real estate stocks should focus on quality, according to Bank of America. The real estate sector of the S & P 500 has been moving higher over the past month or so and is now up 10% year to date, after being in the red earlier this year. The sector hit a 52-week high last week. Real estate investment trusts are also an income play, often paying out attractive dividends. “Stocks with healthy yields become increasingly attractive in a Fed cutting environment,” Jill Carey Hall, an equity and quant strategist at the bank, wrote in a Sept. 9 note that focused on small-cap and midcap REITs. Her work with small-cap and midcap stocks also suggests that dividend yield is the best factor to hedge cycle risk, she added. .SPLRCR YTD mountain S & P 500 Real Estate Sector The Federal Reserve started its rate-cutting cycle last week, slashing the federal funds rate by 50 basis points. The central bank also indicated another 50 basis points of cuts by the end of the year. In this environment, Bank of America likes health care, residential and retail REITs. Health-care real estate is a play on the aging of America , which will see more people seeking medical services and senior housing, Hall said. Residential REITs continue to see demand given housing affordability issues and a majority of retail REITs have beat and raised guidance, she added. When it comes to choosing specific stocks, analyst Jeffrey Spector, the bank’s head of U.S. REITs, suggests looking at names with quality growth, quality value and — with the anticipation of a soft-landing scenario — quality risk. “Higher quality REITs will offer the best earnings and distribution growth,” he wrote in the same note. Quality REITs have resilient pricing power, multiyear earnings visibility based on secular growth drivers, strong and flexible balance sheets and the highest prospect for global inflows. Here are some of the names that made Spector’s top picks list. Welltower is the only large-cap stock that made the cut. The rest are small-cap and midcap REITs. Welltower owns and develops senior housing, skilled nursing/post-acute care facilities and medical office buildings. Near term, Welltower will benefit the most from accelerating occupancy gains amid the post-Covid recovery, Bank of America believes. “In addition, we believe senior housing rate growth will remain robust in 2024 & beyond. WELL has the highest exposure to senior housing operating assets within our coverage universe and based on our demographic analysis has the best positioned portfolio,” the bank said. “Longer term, demographic trends are favorable as baby boomers continue to age.” Shares of Welltower are up 40% year to date. Mid-America Apartment Communities and American Homes 4 Rent are both residential housing plays. The former is a multifamily REIT that operates in communities across the Sunbelt region, where the bank sees robust job growth and a lower cost of living. The latter owns the second-largest single-family rental REIT portfolio in the U.S., Spector wrote. “We remain positive on AMH’s portfolio, limited new supply of single-family homes, structural demographic tailwinds with aging millennials, accretive consolidation/development opportunities, and a strong management,” he said. Mid-America Apartment Communities has gained nearly 18% year to date, while American Homes 4 Rent is up close to 7%. Lastly, Federal Realty Investment Trust owns, operates and develops retail-based properties in coastal markets. Spector said this “blue-chip retail REIT” has a diverse portfolio of shopping centers and should produce growth above its peers in the long term. The stock has moved more than 9% higher so far this year.
