In the attached publication we detail our fundamental credit view for US REITs and offer relative value trade ideas.
US REITs – Recommendation: Marketweight, with selective Overweights and Underweights by sub-verticals, as tailwinds from a more stable interest rate backdrop are offset by headwinds from softening macroeconomic conditions in certain pockets of real-estate.
- We hold a positive view on Data Center and Storage REITs, due to the verticals' strong long-term demand drivers, defensible cash flows relative to more cyclical verticals, and reasonable spread levels. PSA and DLR are our top picks.
- We hold a neutral view on Retail & Triple Net Lease REITs, with a selective Overweight to Grocery, driven by the defensible nature of grocery tenants' businesses in a weaker macro backdrop, and our expectations for weaker consumption to drive higher charge-offs at Non-Grocery names. We see value in KIM vs NNN.
- We hold a neutral view on Industrial and Residential REITs with our expectation for lower occupancy levels in both verticals to be offset by modest rent price growth, and our view spreads compensate for risks. We see value in PLD vs REXR and AVB vs INVH.
- We hold a negative view on Office REITs driven by unfavorable S/D drivers that will result in flat to deteriorating occupancy and risk rental price contraction. We consider the longer-term WFH dynamic which may erode the viability of ‘downtown’ workcenters over time.
US REITs - Relative Value Trade Ideas:
- Long AVB 2030s to shorten two years, pick up 27bp, give USD5 vs AVB 2032s. We recommend reducing exposure to the green AVB 2032s as spreads are tight and coupons lag other issues on the curve.
- Long PLD vs REXR tactically, as we expect negative economic surprises to drive higher-Beta REXR wider given its exposure to CA infill markets and note REXR’s issuance needs in FY24 vs. PLD’s ability to repay outstanding debt. REXR bonds offer little short liquidity, and so we recommend rotating out of the name if held.
- Long PSA 2033s and 2053s vs. EXR equivalents to gain exposure to a high-credit-quality REIT name with bond spreads that haven’t participated in the Sept-present rally and avoid EXR’s heavy FY24 issuance needs. We like PSA long bonds outright as well for those aiming to increase duration
- Long KIM 2025s and 2027s vs. NNN equivalents to pick up 10-15bp and increase exposure to a less cyclical grocery tenant base that is underpinning solid QoQ business momentum.
- Buy BXP 2029s and 2031s to capture value on the issuer’s curve and pick up 140bp over the IG index. We see these wide spreads as compensating for the fundamental challenges BXP faces in FY24.