Tough week for REITs amid more cuts and Fed talks
One of the most difficult parts of investing is deciding what to do when the companies you own are doing well but stock prices reflect a different scenario. Wall Street often looks ahead, so it’s quick to react to news that will affect companies six months or more into the future.
This has been evident in the past few days for REITs (Real estate investment funds), while the Federal Reserve continues its tough talk on inflation and traders wonder about the implications for commercial real estate values and rents. It’s hard for an investor to see their stock lose share value, but that’s exactly what creates the opportunity for higher dividend yields for those brave enough to buy during the dips.
Take a look at half a dozen REITs from four different sub-sectors that have been downgraded in just the past few days.
Braemar Hotels & Resorts (NYSE: BHR) is a Dallas-based REIT that invests in luxury hotels and resorts across the United States and Puerto Rico. Braemar Hotels & Resorts now has investments in 16 properties with 4,184 rooms.
On August 2, Braemar Hotels & Resorts reported its operating results for the second quarter. Adjusted Funds from Operations (AFFO) of $0.20 per share was a decrease of 45.95% from additional funding 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 An increase of 6.76% on revenue of $174.89. million in the second quarter of 2022.
On August 14, analyst Brian Maher B.
“With respect to luxury resort hotels in Braemar, we have written about weak RevPAR (return per available room) for several quarters,” Maher wrote.
Easterly Government Properties Inc. (NYSE: DEA) is a REIT that acquires, develops, and manages Class A commercial real estate and leases them to government agencies through the General Services Administration. Easterly Government Properties owns 86 properties in 26 states. It has an occupancy rate of 98%, which is down from the previous rate of 99%. The leases have a weighted average remaining lease term of 10.4 years.
On August 8, Easterly Government Properties reported a second-quarter FFO of $0.29 per share, in line with analyst consensus estimates. This was a decrease of 12.12% from FFO of $0.33 in the second quarter of 2022. Revenue of $71.37 million topped the agreed estimate of $70.64 million, but was down from revenue of $72.76 million in the second quarter of 2022.
On Aug. 16, RBC Capital Markets analyst Michael Carroll downgraded Easterly Government Properties from the sector to underperform and cut its price target from $15 to $13. In Carroll’s view, “the earnings run rate should trend down slightly in part because of the extension of interest rate swaps adding pressure on the dividend.”
paying off:
Kymco Realty Corp. (NYSE: KIM) is a retail REIT company headquartered in Jericho, New York, that owns and operates 528 outdoor, grocery and unincorporated properties totaling 90 million square feet of leasable space plus ground leases. Most of its real estate – 94% – is in coastal and Sun Belt markets. Founded in 1958, Kimco Realty is a member of the S&P 500 and has been publicly traded on the New York Stock Exchange (NYSE) since 1991.
KYMCO has more than 5,000 different tenants, with lease terms from 5 to 30 years or more. Only 10 of these renters have an annual basic rent exposure (ABR) of more than 1%. Kymco’s relative occupancy rate is 95.8%, its highest since 2019.
On August 16, Goldman Sachs analyst Caitlin Burrows downgraded Kimco Realty from Buy to Neutral and announced a $21 price target. Burroughs cited limited growth in FFO due to near-term vacancies, refinancing headwinds and a slower transaction environment.
Tanger Factory Outlet Centers Inc. (NYSE: SKT) is a retail REIT headquartered in Greensboro, North Carolina, that owns 37 indoor malls and outdoor outlets in 20 states and Canada. More than 2,700 stores occupy 14 million square feet of space in the company’s malls. As of June 30, the occupancy rate is 97.2%, an increase of 2.3% from the second quarter of 2022.
On August 3, Tanger Factory Outlet Centers reported second-quarter earnings. FFO of $0.47 was higher than FFO of $0.45 in Q2 2022, and revenue of $110.64 million beat estimates of $105.55 million and was 4.82% better than revenue of $105.84 million in Q2 2022.
On August 16, Goldman Sachs analyst Burroughs downgraded Tanger Factory Outlet from buy to neutral and announced a $26 price target. Burroughs sees further upside somewhat limited.
Another analyst disagrees with this assessment. On August 7, analyst Floris van Dijkum at Compass Point Research & Trading upgraded Tanger Factory Outlet from neutral to buy and also announced a $26 price target.
SL Green Realty Corp. (NYSE: SLG) is a New York City-based REIT and the largest office building owner in New York. As of June 30, SL Green Realty owned interests in 60 buildings totaling 33.1 million square feet. Many income-conscious investors love owning SL Green Realty for its monthly dividend payout.
On July 19, SL Green Realty reported its operating results for the second quarter. The FFO of $1.43 was down 23.53% from the FFO of $1.87 in Q2 2022 but beat estimates by $0.09. Revenue of $221.07 million was higher than estimates of $205.97 million.
On August 17, BMO Capital analyst John Kim downgraded SL Green Realty from Outperform to Market Perform. But he raised his price target from $32 to $35.
“While BMO still sees positive catalysts in the future, these are of a more incremental nature,” Kim wrote.
Invitation Homes Inc (NYSE: INVH) is a Dallas-based housing fund that purchases a large number of high-quality single-family homes and then leases or purchases them to higher-income renters.
Invitation Homes has more than 80,000 homes for rent in desirable neighborhoods across the United States and is now the largest single-family home owner/property in the United States. It focuses on communities with strong rental demand and where homes are difficult to purchase due to high prices and lack of inventory. The latest occupancy rate was 97.8%.
However, on August 17, BTIG analyst Michael Gorman downgraded Invitation Homes from Buy to Neutral. Gorman pointed to a possible slowdown in the underlying results of the single-family market.
Investors should keep in mind that analysts are correct only about 50% of the time, so it is best for each investor to do their own due diligence rather than relying solely on analyst ratings or price targets.
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