3 Well-Known REITs Get Surprising Downgrades To Start The Week

Analysts downgrading stocks is an everyday occurrence and certainly nothing out of the ordinary. But it's major news when well-regarded stocks with large followings are the subjects of the downgrades.

This week began with downgrades on three popular real estate investment trusts (REITs) across three different subsectors. Two of the downgrades were by the same analyst with Bank of America Securities and one was by an analyst with Argus Research.

Take a look at the three REITs that could be in for a decline in share price as a result.

Boston Properties Inc. BXP is a Boston-based office REIT with 191 properties, as of June 30, concentrated within the six largest cities from Boston to Seattle. The firm calls itself "the largest publicly traded developer, owner and manager of premier workplaces in the United States." Its 54.1 million square feet of space is 88.6% leased with a weighted-average lease term of 7.5 years. Many of its properties are rated as premier quality and located in highly desirable areas of the cities.

On Aug. 14, Argus Research analyst Marie Ferguson downgraded Boston Properties from Buy to Hold. Rising office vacancies, tepid return-to-office trends and high debt interest expenses are holding back many of the office REITs.

But the downgrade is surprising because Boston Properties beat the analyst estimates on both funds from operations (FFO) and revenue in its Aug. 1 second-quarter operating results. The one negative was that despite raising the full-year 2023 FFO guidance, management projected a 4% decrease in midpoint FFO.

The downgrade is also surprising, given that on Aug. 9, Wells Fargo analyst Blaine Heck maintained his Overweight position on Boston Properties and raised the price target from $64 to $80.

Boston Properties pays a quarterly dividend of $0.98. With the decline in price over the last week, the annual $3.92 dividend now yields 6%.

Last year was difficult for Boston Properties, and its total return was negative 40.39%. Year to date in 2023 has been much better, with a total return so far of 3.03%.

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WP Carey Inc. WPC is a New York City-based diversified net-lease REIT, whose single-tenant properties include industrial, warehouse, office, retail and self-storage units. It was founded in 1973 and recently celebrated its 50th year of investing in properties. WP Carey has traded on the New York Stock Exchange since 1998 and converted to a REIT in 2012.

WP Carey presently has 1,475 net-leased properties with approximately 180 million square feet in 26 different countries. Its portfolio includes 398 tenants from over 30 industries and an occupancy rate of 99%. One important consideration is that 99.1% of its property leases include rent escalators to buffer the inflationary environment prevalent today.

WP Carey has raised its quarterly dividend for 98 consecutive quarters, dating to 1999. The annual dividend of $4.28 yields 6.53% and the forward FFO payout ratio is 81.3%. While the payout ratio is a little higher than investors would like to see, it's still easily covering the dividend and has declined over the last few quarters.

WP Carey is another REIT that beat the consensus estimates for FFO and revenue in its July 28 second-quarter earnings report.

But on Aug. 14, Bank of America Securities analyst Joshua Dennerlein downgraded WP Carey from Neutral to Underperform and lowered the price target from $78 to $67. Dennerlein is becoming more bearish on net-lease REITs. 

"Our models already reflect higher interest costs, but risks appear skewed towards further increases in their cost of capital," he wrote. "We will be watching interest rate moves closely."

Dennerlein said he believes that same-store growth has now peaked and that WP Carey will need to dispose of vacant offices going forward.

RBC Capital Markets analyst Brad Heffern still has an Outperform rating and a $79 price target on WP Carey from the end of July.

EPR Properties EPR is a Kansas City, Missouri-based diversified experiential REIT that owns and operates 363 movie theater chains, amusement parks, ski resorts, fitness centers and other recreational venues with over 200 tenants across 44 states.

On Aug. 2, EPR Properties reported its second-quarter operating results. FFO of $1.28 beat the estimates of $1.26 and was up from FFO of $1.17 in the second quarter of 2022. Revenue of $172.19 million crushed the estimates of $148.66 million by 16.31% and was a 7.77% increase over revenue of $160.45 million in the second quarter of 2022.

Along with the second-quarter results, EPR Properties also delivered its full-year 2023 guidance of $5.05 to $5.15. The estimated consensus was $4.90.

On Aug. 14, Bank of America Securities analyst Dennerlein downgraded EPR Properties from Buy to Neutral and lowered the price target from $50 to $45. Dennerlein noted that "the length of the (Hollywood writer/actor) strike and its impact on content production is the key risk from both an upside/downside perspective on the multiple."

One week earlier, JMP Securities analyst Mitch Germain reiterated his Market Outperform rating on EPR Properties with a $54 price target.

One might wonder whether the analyst will readjust EPR Properties' rating should the strike end quickly. If so, the recent price decline from $47.40 to $42.76 could provide investors with an opportunity to pick up share prices with a strong yield. The monthly dividend of $0.275 has a $3.30 annual payout that yields 7.71%.

EPR Properties has performed quite well in 2023, with a total return of 21.1%

Keep in mind that analysts are only correct with their ratings about 50% of the time, and investors should perform their own due diligence before initiating any stock positions.

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