Real Estate REITs Pressured Amid Higher Interest Rate & Supply Woes, But Analyst Upgrades AvalonBay Communities: Here's Why

Piper Sandler analyst Alexander Goldfarb revised ratings on several real estate REITs amid higher interest rates environment and increased supply pressures scenario.

The analyst upgraded AvalonBay Communities Inc AVB to Overweight from Neutral at a lowered price target of $194 (from $197).

The analyst is bullish on AVB as its developments, underwritten during COVID and >7% yields drive its earnings. Also, AVB's market-affordable rents provide insulation to competitive supply, says the analyst.

The analyst cut estimates for FFO by $0.12 to $10.42 (vs. NAREIT guidance of $10.34 - $10.44) for FY23, while raised by $0.23 to $11.17 for FY24 and $0.40 to $11.78 for FY25. 

The analyst raised Q4 FFO to $2.73 from $2.72 (vs. the company's guidance of $2.65-$2.75), reflecting Q3 results, $150 million repayment of floating rate debt, and assuming healthy fundamentals and above-average delivery yields. 

Goldfarb downgraded Mid-America Apartment Communities Inc MAA to Neutral from Overweight at a reduced price target of $130 (from $182) as the supply pressure seems to have a longer-than-expected impact, weighing on new rents. 

The analyst lowered FFO estimates by $0.07 to $9.15 (vs. core FFO guidance of $9.06 - $9.22) for FY23, by $0.07 to $9.51 for FY24, and raised by $0.09 to $10.09 for FY25. 

The analyst estimates Q4 FFO of $2.29 (vs. guidance of $2.21 - $2.37), reflecting Q3 results and a softer leasing environment. 

Also, Goldfarb lowered the rating on Camden Property Trust CPT to Underweight from Neutral and cut the price target to $80 from $126.

The analyst decreased FFO estimates by $0.11 to $6.77 (vs. NAREIT guidance of $6.76 - $6.80) for FY23, by $0.36 to $6.85 for FY24, and by $0.33 to $7.22 for FY25. 

Q4 FY23 FFO is estimated at $1.71 vs. CPT's guidance of $1.70 - $1.74, reflecting Q3 results and assumed lower occupancy into year-end. 

Goldfarb downgraded UDR Inc UDR to Underweight from Neutral at a decreased price target of $30 (from $46).

The analyst lowers FFO estimates by $0.04 to $2.45 (vs. NAREIT guidance of $2.45 - $2.47), by $0.09 to $2.48 for FY24, and by $0.07 to $2.60 for FY25. 

Q4 FY23 FFO is estimated at $0.62 (vs. guidance of $0.62 - $0.64), incorporating Q3 results and compressed rent growth in 2024.

The analyst attributes the downgrade on both UDR and CPT, given the expected further earnings pressure from bad debt and competitive supply lease-ups. Also, surprise negative earnings guidance revision and conference call comments indicate it will take several quarters to stabilize, writes the analyst.

Price Action: AVB shares are trading higher by 1.20% at $164.60, MAA by 0.51% at $118.11, CPT by 0.89% at $84.68, and UDR by 1.12% at $31.98 on the last check Tuesday.

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