VTR - Jefferies likes data center tower industrial senior housing REITs as stagflation risks rise

Increasing stagflation risks in the U.S. could bode well for REITs within data center, industrial and senior housing sub-sectors, Jefferies analyst Jonathon Peterson wrote in a note to clients Thursday.

Those sub-sectors with short-duration leases are "best positioned to capture inflation as leases re-set," Peterson pointed out.

Generally, while an inflation-driven recession could lead to occupancy losses, landlords will likely maintain their pricing power as the relationship between high consumer price inflation and rent growth has been strong for over 60 years, Peterson explained.

Data center REITs, for example, "can mostly pass through rising power costs to customers via higher rents," the note said. Meanwhile, short-selling legend Jim Chanos said he's betting against data centers, adding “the story is that although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centres.”

Overall, Peterson has upgraded the following REITs to a Buy rating: Ventas ( NYSE: VTR ) (health care), Crown Castle International ( NYSE: CCI ) (digital infrastructure), Equinix ( EQIX ) (digital infrastructure) and Digital Realty Trust ( DLR ) (data center).

On the other hand, office and retail REITs have longer leases and a recession may prompt structural changes, Peterson said. In turn, Acadia Realty ( NYSE: AKR ) (retail), Brixmor Property Group ( NYSE: BRX ) (retail), Kite Realty Group ( KRG ) (retail), Omega Healthcare Investors ( OHI ) (health care), Sabra Health ( SBRA ) (health care), RPT Realty ( RPT ) (retail), Simon Property Group (retail) and Highwoods Properties ( HIW ) (office) all downgraded to Hold.

SA's Quant system views National Retail Properties ( NNN ) as the best-rated retail REIT, followed by Agree Realty ( ADC ) and Realty Income ( O ).

Take a look at why SA contributor BeanKounter Capital likes American Tower and Crown Castle as a Strong Buy .

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