REIT Downgrades Cast Gloomy Note As September Begins

September has generally been described as a difficult month for the stock market. This trend dates back almost 100 years and is sometimes attributed to investors making changes to their portfolios by taking profits as summer ends.

This year, the post-Labor Day holiday week began in dour fashion for several real estate investment trusts (REITs) as a slew of analyst downgrades hit the wires shortly before the opening bell on Sept. 5.

Take a look at five downgrades that negatively impacted the REIT sector and helped to drag the Vanguard Real Estate Index Fund ETF VNQ down over 1% to start the first week of September.

Kite Realty Group Trust KRG is an Indianapolis-based retail REIT with 181 open-air and mixed-use properties from Vermont to California. Its strip malls are mostly grocery store anchored, and tenants include CVS, Fresh Market, Best Buy, Burlington Coat Factory, Ross Stores and Costco. Kite Realty had its initial public offering (IPO) in 2004.

On Sept. 5, Raymond James analyst RJ Milligan downgraded Kite Realty Group Trust two levels from Strong Buy to Market Perform. Kite Realty Group shares were down over 2% on the day of the announcement. The analyst noted that capital expenditures will likely remain elevated well into the first half of 2025.

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Federal Realty Investment Trust FRT is a Maryland-based diversified REIT that owns 102 shopping malls and mixed-use offices, as well as 3,100 residential units in wealthier metro markets on both the East and West coasts of the U.S.

A member of the S&P 500, Federal Realty Investment Trust has been in business since 1962 and is one of the oldest REITs on Wall Street. Federal Realty Investment Trust is a Dividend King and holds the ongoing record for annual dividend increases with 55 consecutive years.

Federal Realty Investment also received a downgrade from Raymond James analyst Milligan, from Strong Buy to Outperform. Milligan also lowered the price target from $115 to $104.

Following the downgrade, Federal Realty Investment Trust was down 1.52% on the day.

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Innovative Industrial Properties Inc. IIPR is a San Diego-based diversified/industrial REIT that specializes in triple-net leases and lease-backs on commercial properties with cannabis companies as its sole tenants. 

As of Dec. 31, 2022, Innovative Industrial Properties owned 108 properties in 19 states. Its average lease length is 14.9 years. Of its properties, 90% are industrial, 3% are retail and 6% are industrial/retail. As of June 30, it had a 99.9% occupancy rate.

This week, Compass Point analyst Merrill Ross downgraded Innovative Industrial Properties from Buy to Neutral and announced a $95 price target.

NewLake Capital Partners Inc. NLCP is a New Canaan, Connecticut-based industrial REIT with 31 properties across 12 states. It specializes in triple-net leases to cannabis companies as well as providing capital to them when necessary.  

NewLake Capital Partners was founded in 2019 and had its IPO in August 2021. Its tenants include the largest companies in the cannabis industry, such as Curaleaf, Cresco Labs, Columbia Care and Trulieve. As of June 30, it had a 100% occupancy rate.

This week, Compass Point analyst Ross also downgraded NewLake Capital Partners from Buy to Neutral and announced a $15.50 price target.

The downgrades of both cannabis-focused companies were somewhat surprising, given Innovative Industrial's gain of 6.16% and NewLake Capital's gain of 9.52% for the month of August. 

Citing a reason for the downgrades, the analyst noted that growth in earnings will continue to be elusive in 2024. But analyst Ross cited one positive factor — if marijuana is reclassified from a Schedule I to a Schedule III drug, that would enable marijuana operators to take advantage of income tax deductions for the first time. 

NewLake Capital Partners lost 1% on the day.

Equity LifeStyle Properties Inc. ELS is a residential REIT that specializes in owning and operating manufactured home communities, RV resorts and campgrounds. It owns 450 properties throughout North America of which 225 are RV resorts, 202 are mobile home communities and 23 are marinas. Equity LifeStyle Properties is a member of the S&P MidCap 400.

On Sept. 5, Wells Fargo analyst James Feldman downgraded Equity LifeStyle Properties from Overweight to Equal-Weight. Equity LifeStyle Properties lost 1% following the downgrade.

Investors should keep in mind that analysts are not always correct and even the better ones are only right about 50% of the time. Investors should not just rely on analysts and always do their own research before purchasing any stock.

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