4 REITs Miller Tabak Is No Longer Selling

Back in June, Miller Tabak + Co., LLC predicted that REITs would see valuation multiple contraction as the market anticipated the first Federal Reserve rate hike. Now, three months later, analyst Thomas Mitchell believes that the multiple contraction is now complete and that REITs are once again fairly valued.

The Move

On June 8, Miller Tabak downgraded the REIT sector to Sell, based on the belief that fears over the FOMC’s September decision would drive down the Price/FFO valuation ratio for many REITs. The firm set a Price/FFO target of 16.0x estimated 2016 FFOs.

It took almost exactly three months for the REITs to hit the firm’s target ratio, and now Mitchell has upgraded the sector to Hold.

Related Link: CareTrust REIT Sees FY 2015 Rental Revs Of $66.0 Million

Outlook

According to Mitchell, the anticipated long-term FOMC tightening cycle will likely be a major headwind for net asset value (NAV) growth among REITs that own real estate. Therefore, as the interest rate cycle continues to play out, it’s likely that the Price/FFO multiple for REITs will take another hit at some point in coming years.

“At this moment, both the degree and pace of expected Fed rate hikes are still much in doubt, and REIT business conditions – occupancy, rent increases, very moderate new supply coming via construction starts – all indicate solid 2016 FFO growth,” Mitchell explained.

The firm’s FFO growth projections indicate that the decline in REIT stocks in 2015 is likely over for now.

Hold-Rated Names

Mitchell’s report included upgrades of four previously Sell-rated REITs to Hold. The upgraded REITs include:

• Apartment Investment and Management Co (NYSE: AIV)
• Duke Realty Corp (NYSE: DRE)
• Equity Residential (NYSE: EQR)
• UDR, Inc. (NYSE: UDR)

Miller Tabak also maintains its Hold rating on Home Properties, Inc. (NYSE: HME).

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