Analysts: REIT Upgrades Trounce Downgrades By 2 To 1 In April

The spring season typically brings with it the idea of new beginnings, whether it’s flowers blooming, new fashions or another great baseball season. For investors in real estate investment trusts (REITs), the analyst downgrades and price cuts of last winter are quickly disappearing and being replaced by optimism, in which new upgrades are appearing almost every day.

Since April 1, REIT upgrades have predominated over downgrades by a 2-to-1 margin. What makes this even better for investors is that the upgrades are not confined to one or two subsectors but have encompassed several subsectors of the REIT universe.

It began on April 3 when BMO Capital Markets upgraded office REIT SL Green Realty Corp. SLG, the largest office landlord in New York City but one of the worst-performing REITs of 2022-2023. BMO Capital raised its rating from Market Perform to Outperform and announced a $30 price target that was 26% higher than SL Green’s last traded price.

If an analyst could find positives in a stock that had a total negative return of 63.74% between Jan. 1, 2022, and April 2023, it was only a matter of time before more analysts would spring forth to begin praising other REITs.

And suddenly the upgrades are popping up like daffodils in an early spring meadow. Since April 3, there have been six total REIT upgrades by five analysts and only three downgrades. The chart below shows the old and new ratings and price targets for the upgraded issues. In the explanation that follows, notice the diversity of the sectors and stocks being upgraded as well. 

SL Green Realty Corp. is an office REIT, and the largest landlord of office buildings in New York City.

Extra Space Storage Inc. EXR is a self-storage REIT that recently made headlines when it purchased rival Life Storage Inc. LSI.

Welltower Inc. WELL is a healthcare REIT that provides real estate capital to housing operators of senior care, post-acute care providers and other health systems.

Weyerhaeuser Co. WY is a specialty REIT that owns and manages timberlands and manufactures wood products.

American Homes 4 Rent Class A AMH is a residential REIT that acquires, owns and leases single-family homes.

AvalonBay Communities Inc. AVB is a residential REIT that owns, leases and operates apartment communities.

The analyst upgrades across several subsectors show optimism that REITs as a distinct investment class could be turning around from the poor performances that characterized this sector over the past year. Rising inflation and Federal Reserve interest rate hikes pounded some share prices as much as 70% lower.

The upgrades come at a time when many investors are concerned about an inflation-induced recession and what that might mean for different REIT subsectors. Questions abound about future office occupancy in a stay-at-home work culture, especially if companies begin to downsize. Investors wonder whether hotel REITs will suffer if people or businesses reduce their travel. Others question whether mom-and-pop retail outlets and restaurants can keep their doors open, leading to lower occupancy rates among retail REITs.

It's also positive to see two upgrades for residential REITs. When recessions force businesses to cut workers, landlords often see unemployed tenants move out suddenly because they can no longer pay rent, and it often takes a long time to acquire new tenants.

But stocks frequently climb the proverbial “wall of worry,” and this year could be no different for REITs. Although investors should do their own due diligence and not rely only upon the words of analysts, it’s positive to see more REIT upgrades than downgrades for the first time in quite a while.

Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.

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