The commercial real estate recovery may be just around the corner.
Compared with other parts of the economy, the U.S. real estate market has held up well in 2020. However, the performance of real estate investment trusts, or REITs, has lagged the S&P 500 in large part due to horrendous returns from commercial REITs such as Simon Property Group (ticker: SPG). Bank of America analyst Jeffrey Spector says there has historically been a six-month delay between the beginning of an economic recovery and improvement in real estate fundamentals. Here are eight of Bank of America's top REITs to buy and hold for the long term that have at least 4% dividends.
Acadia Realty Trust (AKR)
Acadia Realty Trust is a strip-mall REIT. The second quarter was horrendous for strip-mall REITs in general, but analyst Craig Schmidt says Acadia reported numbers in line with his expectations and outperformed its peers on rent collection. Target Corp. (TGT) is one of Acadia's largest tenants, and Target reported record same-store sales growth in the second quarter. Bank of America estimates strip-mall REITs' July collections improved by 6.3% over June levels, a solid start to the third quarter. Acadia has a 7% dividend. Bank of America has a "buy" rating and $15.50 price target for AKR stock.
Regency Centers Corp. (REG)
Regency Centers is a strip-mall REIT focused on grocery-anchored community shopping centers. Schmidt says the second quarter of 2020 was unquestionably the most difficult quarter REIT landlords have faced in the modern era. Fortunately, 80% of Regency's properties have a grocery anchor, and grocery stores represent more than 20% of the REIT's annual base rent. Many retail stores have been crushed in 2020, but grocery stores have thrived as more Americans are cooking and eating at home. Regency pays a 6.5% dividend. Bank of America has a "buy" rating and $48 price target for REG stock.
Highwoods Properties (HIW)
Highwoods Properties is an office REIT that owns and manages properties in the Southeastern U.S. and in Pittsburgh. In the second quarter, Highwoods beat consensus analyst estimates for funds from operations and increased its full-year FFO guidance range slightly. It also provided initial free rent periods on lease extensions. Analyst James Feldman says he believes Highwoods' Sunbelt properties will outperform other regions during the economic downturn, and low physical occupancy rates will reduce office operating expenses. Highwoods pays a 5.8% dividend. Bank of America has a "buy" rating and $45 price target for HIW stock.
Corporate Office Properties Trust (OFC)
Corporate Office Properties Trust owns high-security office properties leased to government and contractor tenants. Corporate Office reported above-consensus FFO in the second quarter, and Feldman says it is one of the best-positioned office REITs to navigate the downturn. Corporate Office collected more than 99% of rent from pre-pandemic tenants in the second quarter. Roughly 88% of the company's rent comes from the defense industry or information technology tenants, and Feldman says both political parties support defense and IT spending. The REIT pays a 4.9% dividend. Bank of America has a "buy" rating and $30 price target for OFC stock.
Boston Properties (BXP)
Boston Properties owns and operates a portfolio of Class A office buildings in Boston, Washington, New York and other large cities. Boston Properties has been one of the hardest-hit REITs in 2020 given its exposure to urban markets, but Spector says Boston Properties' high-quality assets, its solid balance sheet and its forward-thinking development team will help the company navigate near-term headwinds and earnings disruptions. Boston Properties has $1.7 billion in cash and $3.5 billion in total liquidity. The REIT pays a 4.9% dividend. Bank of America has a "buy" rating and $100 price target for BXP stock.
Realty Income Corp. (O)
Realty Income is a triple-net REIT, which means its retail tenants pay all expenses related to its properties, including real estate taxes, building insurance and maintenance. Spector says Realty Income's total portfolio rent collection percentage increased from 86.5% in the second quarter to 91.5% in July, a positive sign for the second half of 2020. The company also reinstated its 2020 acquisition spending guidance of between $1.25 billion and $1.75 billion, another bullish sign. Realty Income pays a 4.7% dividend. Bank of America has a "buy" rating and $74 price target for O stock.
UDR is an apartment REIT that owns and operates multifamily real estate properties across the U.S. The pandemic has had a negative impact on UDR's coastal, urban markets. Residential leasing demand is weak, and lessors are facing pressured rates in the near term. Unfortunately, UDR has high exposure to tech-heavy markets being impacted by the remote work trend, including San Francisco, Seattle and Austin, Texas. However, the company has $973 million in total liquidity, suggesting its 4.5% dividend is safe while it rides out the storm. Bank of America has a "buy" rating and $45 price target for UDR stock.
Hudson Pacific Properties (HPP)
Hudson Pacific Properties owns office properties and media and entertainment campuses in California and the Pacific Northwest. In the second quarter, Hudson collected just 31.4% of its pre-pandemic retail rent billings, but it collected 96.9% of its office billings and 100% of its studio billings. Feldman is positive on Hudson's media and studio properties and says its diversified exposure to California positions the company well no matter how living location preferences may change after the health crisis. Hudson Pacific pays a 4.7% dividend. Bank of America has a "buy" rating and $45 price target for HPP stock.
Best high-yield REITs:
-- Acadia Realty Trust (AKR)
-- Regency Centers Corp. (REG)
-- Highwoods Properties (HIW)
-- Corporate Office Properties Trust (OFC)
-- Boston Properties (BXP)
-- Realty Income Corp. (O)
-- UDR (UDR)
-- Hudson Pacific Properties (HPP)