EquityResearch4February2019FOCUSBarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE131.U.S.REITsTheYearAhead:2019OutlookIt’sTime[Still]:UpgradingREITs.REITshaveunderperformedthebroadermarketforthepastfouryears.Notwithstandingan11.6%moveinJanuary,(afteran8.8%declineinDecember)weareupgradingoursectorratingonU.S.REITsfromNeutraltoPositive.Thismove,inthefaceofcurrentmarketvolitilityischallenging;wemaybeabitlate,orwemaybeabitearly,butwethinkourcallwillhavelegslongerterm.Atthesametime,itisabitcontrarian.Latecycleconcerns–slowinggrowth,risinginterestratesandfullassetvalues–arestillaperceputaloverhangforREITs.Wehavelongthoughtthoseconcernsareoverdone,andthatrealestatefundamentalshaveagoodrunwayforcontinuedstrength,particularlycomparedtotheslowingbroadermarket.REITshaveproventoberelativelydefensive,whichgivencurrentmacroandglobaluncertaintyshouldsupportourupgrade.Totalreturnvehicles,REITsprovidemoderateearningsgrowth,underpinnedbylongdurationcontracts,andasolidcurrentyield.Finally,REITearningsgrowthwillbesteady,andmayinflectpositively,evenasS&Pexpectationsfall.Valuations–thoughlesscompellingthanatyear-end–areattractive;weexpecta10.0%totalreturnfromourcoverageuniverse.Butit'sastockpickinggame–ourOWREITsareexpectedtoreturnanaverageof12.1%includinga3.6%dividendyield.Subsector/StockSelectionisKey.Ourupgradeonlyworkswiththerightstocks.Westillthinkthereismoneytobemade,withalongertermperspective,asfollows:Multifamily:UpgradingtoPositivedrivenbylongtermseculartrends/upsidepotentialanddownsideprotection.WereiterateOWonESSandMAA,upgradeCPTtoOWforexposureto18hourcitiesanddowngradeAIVtoEWonslowinggrowth.Office:NeutralwithaPositivetilt.Ouroutlookfortheoffices...
