Three REITs With New Downgrades This Week

It's difficult for investors when analysts downgrade their stocks. But there are many reasons for an analyst downgrade. Sometimes a stock has risen to the point where the analyst feels it's no longer a good value relative to its price. At other times, competition, a perceived downturn in the general economy or the resignation of a longstanding company insider may lead the analyst to believe that a company is unlikely to perform well in the coming months.

Whatever the reason, the usual outcome from a downgrade is a drop in the share price. But the drop may be temporary if the company develops new business, economic forecasts improve or new leadership proves its merit.

Take a look at three real estate investment trusts (REITs) that have just received analyst downgrades and some of the concerns that warranted those decisions.

TPG RE Finance Trust Inc. TRTX, a subsidiary of TPG Real Estate, is a mortgage REIT with a $4.2 billion portfolio of first mortgage loans with an average loan size of $71.6 million, in geographically diversified primary and select secondary markets across the U.S.

On February 20, TPG RE Finance Trust reported its Q4 operating results. Adjusted earnings per share (EPS) of $2.05 missed the estimate of $0.17. Revenue of $31.49 million was ahead of estimates of $24.73 million but below revenue from Q4 2022 of $35.99 million.

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Despite the less-than-favorable earnings report, the earnings call was upbeat, and investors have continued to support the stock. Year-to-date, TPG RE Finance has had a total return of 16.33%.

On April 12, Raymond James analyst Stephen Laws downgraded TPG RE Finance Trust from Strong Buy to Outperform while maintaining the price target at $8.50. This is still above the consensus average one-year price target of $7.90.

Arbor Realty Trust Inc. ABR is a Long Island-based mortgage REIT (mREIT) that initiates bridge and mezzanine loans for commercial and residential properties. Many of its loans originate through Fannie Mae and Freddie Mac programs.

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Arbor Realty Trust generates profits by the spread between the loan financing cost and the interest earned from that loan. Many of Arbor Realty Trust's commercial loans are first mortgage liens that are short-term with higher interest rates.

Arbor Realty's mid-February quarterly report was somewhat mixed. Adjusted earnings per share (EPS) of $0.51 beat the consensus estimate of $0.44 per share, but it was 15% below EPS of $0.60 in Q4 2022. Revenue of $103.58 million also beat the consensus estimate of $97.65 million but decreased from $113.06 million in Q4 2022. 

On April 11, Wedbush analyst Jay McCanless downgraded Arbor Realty Trust from Outperform to Neutral and lowered the price target by 23.5% from $17 to $13.

McCanless is concerned about higher interest rates for longer and the subsequent risks that Arbor Realty will incur for more delinquencies and non-performing loans. In addition, he sees the potential for lower loan volume. The analyst lowered the EPS estimate from $1.95 to $1.80 for 2024.

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Clipper Realty Inc. CLPR is a small, New York-based, self-administered and self-managed REIT that owns, manages, operates and repositions multifamily residential and commercial properties in the New York City area. It was formed in 2017.

On March 14, Clipper Realty reported its Q4 2023 operating results. Funds from operations (FFO) of $0.15 per share beat the estimate of $0.13 per share and represented a 36.36% increase from FFO of $0.11 per share in Q4 2022. Revenue of $34.87 million was below the consensus estimate of $37.28 million but slightly above revenue of $33.01 million in Q4 2022.

On April 11, JMP Securities analyst Aaron Hecht downgraded Clipper Realty from Market Outperform to Market Perform.

Hecht noted Clipper's recent announcement as part of its Q4 earnings report that it is losing its tenant at 12-story 250 Livingston Street in Brooklyn at the end of its lease in August 2025. The tenant is the City of New York, and the annual rent is $15.4 million.

While that gives Clipper plenty of time to re-lease the space, the analyst also noted that the tenant in this 294,144 square-foot commercial and residential building accounts for approximately 15% of Clipper's net operating income. This creates what Hecht called "tenant uncertainty," and Hecht believes that Clipper Realty is now fairly valued.

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