MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
When we launched REIT coverage at MSUSA in July 2014, we were asked how we plan to differentiate ourselves. As has always been our way, we have attempted to consider issues with a second derivative mindset, in this case by comparing similar REITs head-to-head while regularly collaborating with our MSUSA colleagues on the economy, healthcare and technology. These serve as the basis to our investment theses for 2016, with a possible "kicker" from increased foreign investment.
The Economy: We have worked regularly with MSUSA Chief Economist Steve Ricchiuto to gauge the potential impact from Fed policy on the economy and interest rates. Steve has gone against the grain in his view that the Fed should have waited longer before raising short-term rates, and we provide some of his latest comments in this report. The bottom line is the December increase has turned out to be the policy error he expected, and Steve continues to forecast a flattening of the interest rate curve. While consensus might have anticipated a commensurate rise in the ten-year Treasury yield, Steve has stuck to his 1.75%-2.25% range. We think further downward pressure on long-term rates could be the story during 2016, and that should be positive for US REITs. As such, we do not fear higher- yielding REITs, and this has been one consideration in our bend into the out-of-favor suburban office sector where direct investment is catching a bid in many second-tier markets. We maintain a handful of Buy ratings in that corner of the office sector: BDN, OFC, DEI, and PKY.
Healthcare: We have also collaborated with our Healthcare Services group, Sheryl Skolnick and Ann Hynes, providing us with unique insights into the Medicare bundling initiatives introduced by CMS that are starting to impact post-acute operators -- including publicly-traded GEN and KND. This has caused us to take a pause on most healthcare REITs, and is having a piling-on effect considering the supply issues in the senior housing segment. We suggest investors look to smaller cap and pure-play triple net REITs like LTC or medical office player HR (both Buy-rated). We also have an event-driven Buy rating on SBRA.
Technology: Last week, we worked with our technology team to produce a note on the state of the private tech market. While sentiment (at least) has weighed on some REITs heavily invested in the Bay Area, we did take note that the casino mentality of 2000 was not apparent in office rents today.
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