Analysts Just Downgraded These Three REITs

It's always a difficult pill for investors to swallow when analysts downgrade their stocks. 

Some reasons for analyst downgrades are: The stock has risen to the point where the analyst feels the stock is no longer a good value relative to its price, or an analyst feels that a company is unlikely to perform well in the coming months. This could be because of competition, a perceived downturn in the general economy or the resignation of a longstanding company insider.

Whatever the reason, a drop in the share price is the usual outcome following a downgrade, and investors must decide whether to hold on or sell.

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Take a look at three real estate investment trusts (REITs) that received analyst downgrades this week, including one curious downgrade coming on the heels of positive developments and in opposition to some other recent analyst views.

Weyerhaeuser Co. WY is a Seattle-based specialty REIT that invests in 11 million acres of timberland, manages additional timberlands in Canada and manufactures wood products for home building. It was founded in 1990.

On Nov. 27, Raymond James analyst Buck Horne downgraded Weyerhaeuser from Strong Buy to Market Perform. No price target was given.

In Horne's view, lower prices on building materials are affecting forest product companies. Slower home sales, higher interest rates on home equity lines of credit and a decline in home remodeling activity are to blame. He noted, "We have a reasonably strong level of confidence that single-family housing starts will continue to trend modestly higher next year, but unfortunately, it is much more difficult for us to predict exactly when these other factors will resolve themselves."

It's easy to see one reason for the downgrade. On Oct. 28, Weyerhaeuser reported non-generally accepted accounting principles (GAAP) earnings per share (EPS) of $0.33, which missed the analyst estimates of $0.34. Revenue of $2.022 billion missed the estimates of $2.066 billion.

PotlatchDeltic Corp. PCH is another specialty REIT that invests in timberland. The Spokane, Washington-based company owns nearly 2.2 million acres of timberlands across seven states. It was founded in 1903 as Clearwater Timber Co. and became a REIT in 2006. PotlatchDeltic merged with CatchMark Timber Trust Inc. in 2022.

On Nov. 27, Horne also downgraded PotlatchDeltic from Strong Buy to Market Perform. The analyst cited the same issues in his downgrade of PotlatchDeltic as he did for Weyerhaeuser. Again, no price target was given.

On Oct. 30, in its third-quarter operating results, PotlatchDeltic missed analyst estimates on non-GAAP EPS by $0.05 but beat the estimates on revenue by $1.6 million.

On Nov. 1, Truist Securities analyst Michael Roxland maintained a Hold on PotlatchDeltic, while lowering his price target from $55 to $50. The same day, RBC Capital Markets analyst Paul Quinn maintained PotlatchDeltic with a Sector Perform rating and lowered the price target from $52 to $48.

Welltower Inc. WELL is a Toledo, Ohio-based healthcare REIT that owns interests in senior housing, post-acute care communities and outpatient medical properties by providing capital to the operators who run these facilities. 

Welltower was founded in 1970 under the name of Health Care Fund and was incorporated as a REIT in 1985. Welltower is a member of the S&P 500 and has a portfolio of 2,017 properties across the U.S.

On Nov. 28, RBC Capital Markets analyst Michael Carroll downgraded Welltower from Outperform to Sector Perform but raised the price target from $92 to $97.

This is a curious downgrade, given several of Welltower's recent positive developments, along with the analyst simultaneously raising the price target by several points. Welltower recently closed at $90.12, so a $97 price target gives the stock a potential boost of 7.6%.

On Oct. 30, Welltower reported its third-quarter operating results. Funds from operations (FFO) of $0.92 per share beat the estimates of $0.89 and the FFO of $0.84 in the third quarter of 2022. Revenue of $1.66 billion beat the consensus estimate of $1.622 billion and was a 12.65% increase over third-quarter 2022 revenue of $1.47 billion. Welltower also raised its guidance for full-year FFO from $3.51-$3.60 to $3.59-$3.63.

On Nov. 9, Raymond James analyst Jonathan Hughes upgraded Welltower from Outperform to Strong Buy and raised the price target from $95 to $101, saying that its earnings should get a lift by increases in net operating income from its senior housing portfolio and a recent $1.5 billion equity offering of 17.5 million shares that will allow Welltower to acquire more senior housing and skilled nursing facilities (SNF).

Welltower announced on Nov. 13 that it acquired 23 properties from Chartwell Retirement Residences CWSRF while disposing of 16 other properties to Chartwell and other joint-venture partners in an agreement that will also dissolve the joint venture. Welltower's incremental investment of CA$113.3 million ($83.4 million) is expected to occur at an estimated 30% discount to replacement cost.

On Nov. 27, Evercore ISI Group maintained an In-Line position on Welltower and raised the price target from $86 to $89.

Investors should keep in mind that analysts are only correct about 50% of the time and perform their own due diligence before making decisions on the purchase or sale of stocks.

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