2 REITs To Avoid In 2018, According To BMO

With the 10-year yield rising toward 3 percent and boosting costs of capital, cap rates and dividend yields, 2018 isn’t looking so great for real estate investment trusts.

One analyst anticipates a 5-percent decline in the MSCIUSREIT INDEX RMZ partly driven by underperformance in two component stocks.

The Rating

BMO Capital Markets analyst John Kim downgraded Boston Properties, Inc. BXP and Healthcare Realty Trust Inc HR to Market Perform and lowered their respective price targets from $135 to $134 and from $34 to $33.

The Thesis

The rating changes were largely justified by assumed increases in interest and cap rates.

At the same time, Healthcare Realty is seen to have expended potential profits from its industry-leading assets.

“While we believe HR has the highest-quality MOB [medical office building] portfolios among REITs, we believe it is largely reflected in its premium valuation,” Kim wrote in a Tuesday note.

Meanwhile, Boston Properties’ unattractiveness is essentially relative.

“While BXP trades at a discount to NAV [net asset value], we see deeper value elsewhere in the office REIT sector,” Kim wrote.

Their individual circumstances are compounded by expectations of industry earnings misses in funds from operations, fostered by a peak in occupancy, lack of accretion in debt refinancing and limited opportunity for external growth.

Price Action

Healthcare Realty fell 2 percent and Boston Properties 1 percent.

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KeyBanc's Guide To REITs In 2018: Expect 5-10% Returns