One of the most challenging parts of investing is deciding what to do when the companies you own are doing well but the share prices reflect a different scenario. Wall Street is often forward looking, so it's quick to react to news that will affect companies six or more months down the road.
This has been evident the last few days for real estate investment trusts (REITs), as the Federal Reserve continues to talk tough on inflation and traders wonder what the effects will be on commercial property values and rents. It's difficult for an investor to see their stocks losing share value, but that's precisely what creates the opportunity for higher dividend yields for those brave enough to buy during declines.
Take a look at a half dozen REITs from four different subsectors that have been downgraded in just the past few days.
Braemar Hotels & Resorts BHR is a Dallas-based REIT that invests in luxury hotels and resorts across the U.S. and Puerto Rico. Braemar Hotels & Resorts now has investments in 16 properties with 4,184 rooms.
On Aug. 2, Braemar Hotels & Resorts reported its second-quarter operating results. Adjusted funds from operations (AFFO) of $0.20 per share was a 45.95% decrease from FFO of $0.37 per share in the second quarter of 2022. Revenue of $186.71 million beat the consensus estimate of $173.87 million and was a 6.76% increase over revenue of $174.89 million in the second quarter of 2022.
On Aug. 14, B. Riley Securities analyst Bryan Maher downgraded Braemar Hotels & Resorts from Buy to Neutral and lowered the price target from $7 to $3.50.
"As it relates to Braemar's luxury resort hotels, we have been writing about RevPAR (revenue per available room) weakening for several quarters," Maher wrote.
Easterly Government Properties Inc. DEA is an office REIT that acquires, develops and manages Class A commercial properties and leases them to government agencies through the General Services Administration. Easterly Government Properties owns 86 properties in 26 states. Its occupancy rate is 98%, which is down from the previous rate of 99%. Its leases have a weighted average remaining lease term of 10.4 years.
On Aug. 8, Easterly Government Properties reported second-quarter FFO of $0.29 per share, in line with analyst consensus estimates. This was a 12.12% decrease from FFO of $0.33 in the second quarter of 2022. Revenue of $71.37 million beat the consensus estimate of $70.64 million but was a decrease from revenue of $72.76 million in the second quarter of 2022.
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On Aug. 16, RBC Capital Markets analyst Michael Carroll downgraded Easterly Government Properties from Sector Perform to Underperform and lowered the price target from $15 to $13. In Carroll's view, the "earnings run-rate should trend modestly lower in part due to the rollover of interest rate swaps further pressuring the dividend."
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Kimco Realty Corp. KIM is a Jericho, New York-based retail REIT that owns and operates 528 open-air, grocery store-anchored and unanchored properties with 90 million square feet of leasable space in addition to ground leases. Most of its properties — 94% — are in coastal and Sun Belt markets. Kimco Realty was founded in 1958, is a member of the S&P 500 and has been publicly traded on the New York Stock Exchange (NYSE) since 1991.
Kimco has over 5,000 different tenants, with lease terms of five to 30 years or longer. Only 10 of those tenants have annual base rent (ABR) exposure over 1%. Kimco has a Pro-rata occupancy rate of 95.8%, its highest rate since 2019.
On Aug. 16, Goldman Sachs analyst Caitlin Burrows downgraded Kimco Realty from Buy to Neutral and announced a price target of $21. Burrows cited limited FFO growth because of near-term vacancies, refinance headwinds and a slower transaction environment.
Tanger Factory Outlet Centers Inc. SKT is a Greensboro, North Carolina-based retail REIT that owns 37 indoor shopping centers and outdoor factory outlet malls in 20 states and Canada. More than 2,700 stores occupy the 14 million square feet in the company's shopping centers. As of June 30, it had an occupancy rate of 97.2%, an increase of 2.3% since the second quarter of 2022.
On Aug. 3, Tanger Factory Outlet Centers reported second-quarter earnings. FFO of $0.47 was up from FFO of $0.45 in the second quarter of 2022, and revenue of $110.64 million beat the estimate of $105.55 million and was 4.82% better than revenue of $105.84 million in the second quarter of 2022.
On Aug. 16, Goldman Sachs analyst Burrows downgraded Tanger Factory Outlet from Buy to Neutral and announced a price target of $26. Burrows sees further upside as somewhat limited.
Another analyst disagrees with that assessment. On Aug. 7, Compass Point Research & Trading analyst Floris van Dijkum upgraded Tanger Factory Outlet from Neutral to Buy and also announced a $26 price target.
SL Green Realty Corp. SLG is a New York City-based office REIT and the largest office building landlord in New York. As of June 30, SL Green Realty held interests in 60 buildings totaling 33.1 million square feet. Many income-oriented investors like owning SL Green Realty for its monthly paying dividend.
On July 19, SL Green Realty reported its second-quarter operating results. FFO of $1.43 was down 23.53% from FFO of $1.87 in the second quarter of 2022 but beat the estimates by $0.09. Revenue of $221.07 million was above estimates of $205.97 million.
On Aug. 17, BMO Capital analyst John Kim downgraded SL Green Realty from Outperform to Market Perform. But he raised the price target from $32 to $35.
"While BMO still sees positive catalysts ahead, they are more incremental in nature," Kim wrote.
Invitation Homes Inc. INVH is a Dallas-based residential REIT that purchases large numbers of higher-quality single-family homes and then leases or lease-purchases them to higher-income tenants.
Invitation Homes has over 80,000 homes for lease in desirable neighborhoods across the U.S. and is now the largest owner/landlord of single-family homes in the U.S. It focuses on communities with strong rental demand and where purchasing homes is difficult because of high prices and a lack of inventory. Its recent occupancy rate was 97.8%.
Nevertheless, on Aug. 17, BTIG analyst Michael Gorman downgraded Invitation Homes from Buy to Neutral. Gorman cited a potential slowdown in fundamental results for the single-family residential market.
Investors should keep in mind that analysts are only correct about 50% of the time, so it's best for each investor to perform their own due diligence rather than relying solely on the ratings or price targets of analysts.
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