REITs Rocked By Surge Of New Price Target Cuts — Are More Ahead?

Investors know the pain of seeing some of their stocks tumble after an analyst downgrade, but stocks also can slide when analysts maintain previous ratings but slash previous stock price targets by 10% or 20%.

As Wall Street grapples with the latest Federal Reserve meeting minutes that suggest more interest rate hikes could be forthcoming, droves of analysts have been slashing price targets on interest-sensitive stocks such as real estate investment trusts (REITs). Over the past week,18 price targets across multiple sectors have been lowered, with no letup in sight. An almost equal number of price targets also were cut in the previous week.

In fairness, an equal number of price target raises have occurred this past week, but 13 of the 18 originated with just three analysts: Anthony Paolone of JPMorgan, Steve Sakwa of Evercore ISI Group and Craig Schmidt of Bank of America Securities. The price hikes affected just three subsectors — Paolone raised price targets on four residential REITs, Sakwa raised targets on seven office REITs, and Schmidt raised targets on two retail REITs.

By contrast, 12 analysts lowered price targets on seven REIT subsectors. Of the 18 price cuts, 15 were on REITs where the analyst maintained the previous rating, and three were on new downgrades.

Given the recent news on interest rates, along with weakness in the REIT sector, it's possible that further price target cuts could negatively affect REIT prices for the remainder of 2023.

The chart below shows the REITs that had price targets slashed this week. Notice the number of different analysts and the various subsectors involved:

For investors who own any of these stocks, the question becomes: Should they hold, sell shares or buy more?  There is no simple answer, as individual risk tolerance, income needs and purchase price will vary among investors. Someone who bought American Tower Corp. AMT at $100 may react quite differently to a target price cut than someone who bought the stock at $205.

If one is strictly an income investor, if the REIT does not cut nor eliminate the dividend, there is no reason to panic sell on a price decline. Only the income generated every month or quarter is important. If the dividend yield is substantially greater than the yield on shares already owned, it could be a good opportunity for an investor to add to their preexisting shares.

The other question to consider is whether the basic fundamentals of the stock have changed. A rising interest rate environment may take share prices down, but the economic climate can change in a few months. That's different from a company that has lost a once-held competitive advantage or whose management has changed for the worse.

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Investors should keep in mind that analysts are only correct about 50% of the time, so investors should always perform their own due diligence and never rely on the opinion of an analyst alone in making investment decisions.

Weekly REIT Report: REITs are one of the most misunderstood investment options, making it difficult for investors to spot incredible opportunities until it's too late. Benzinga's in-house real estate research team has been working hard to identify the greatest opportunities in today's market, which you can gain access to for free by signing up for the Weekly REIT Report.

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