Last week was brutal for Wall Street and in particular for real estate investment trusts (REITs), as hawkish verbiage by Federal Reserve Chair Jerome Powell and two major bank failures led to massive sell-offs in the major indices.

Over the past few weeks, several REITs have benefited from price target hikes by analysts but without lifts in previous analyst positions — until now.

Within the last few market days, two well-known REITs have been upgraded by major firms. What has led to these sudden changes of positions, and why did these two analysts dare to go where no analysts have gone in quite a while? Take a look.

On March 9, KeyBanc Capital Markets Inc. analyst Todd Thomas upgraded VICI Properties from Sector Weight to Overweight but did not cite a price target nor had one been assigned previously.

One reason VICI Properties has been able to perform well during a rising interest rate period is that over 40% of its leases have escalators for inflation. Investors in VICI Properties were not as concerned about rising inflation as with some other REITs.

Another reason was VICI Properties’ Feb. 16 announcement that it entered into a triple-net lease agreement with Cherokee Nation Businesses, the operator of Gold Strike Casino Resort, in Tunica, Mississippi. There is an initial annual rent of $40 million, and the lease has a 25-year term with three 10-year tenant renewal options. The lease also includes rent escalators.

On Feb. 23, VICI Properties announced its fourth-quarter operating results. Funds from operations (FFO) of $0.51 was 15.91% above FFO of $0.44 in the fourth quarter of 2021. Revenue of $769.91 million was better than the estimate for $752.76 million and a 100.94% increase over revenue of $383.15 million in the fourth quarter of 2021.

VICI Properties has a total return of 0.41% year to date and a 52-week total return of 24.69%.

On March 8, J.P. Morgan analyst Richard Shane upgraded AGNC Investment Corp. from Neutral to Overweight and announced a price target of $12.50. From its recent closing price, that represents a rather lofty potential upside of 25.3%.

AGNC Investment has performed fairly well in recent months after a rocky 2022 that saw it lose 23.68%. From the start of the new year until the end of February, AGNC Investment was up 6.21%. Yet after the recent decline in most REITs, and especially mREITs, AGNC Investment is now down 2.39% year-to-date.

On Jan. 30, AGNC Investment announced its fourth-quarter earnings. Tangible net book value per common share increased from $9.08 in the third quarter of 2022 to $9.84 in the fourth quarter. Earnings per share (EPS) of $0.74 beat the consensus estimates of $0.65.  

Analyst Shane’s reason for the upgrade on AGNC Investment was his belief that the Fed rate hikes may be nearing the end. He wrote, “When rates ultimately begin to recede, AGNC’s positive duration shifts to a tailwind.” He also noted that he expects AGNC’s agency mortgage-backed securities (MBS) portfolio to increase book value as MBS prices begin to recover.

Some on Wall Street are beginning to predict that given the two large bank failures within the past few days, the Fed will be unable to raise interest rates in its March meeting, or if it does, it will only be a 25 basis point hike, rather than the 50 basis point hike previously discussed by a couple of Fed governors.

A pause in rate hikes would help mREITs such as AGNC Investment Corp.

Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.

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