Nobody likes to begin Monday morning hearing bad news, but that’s what happened this week to investors when Wolfe Research analyst Andrew Rosivach downgraded four real estate investment trusts (REITs) to kick off the new market week.
Analysts carry a lot of weight, and when one or more downgrades a stock, it can cause shares to drop by several percentage points in just a few days. For example, on March 23, Barclays Investment Bank analyst Anthony Powell downgraded SL Green Realty Corp. SLG from Equal-Weight to Underweight. SL Green closed at $21.37 the previous day, but on the day of the downgrade, it closed at $19.49, down 8.7%.
The reverse is also true, in that analyst upgrades can cause stocks to spike higher quickly. But on this day, apartment REITs were set to sell off following Rosivach’s report. Take a look at the four REITs that were downgraded by this analyst:
Essex Property Trust Inc. ESS: Rosivach downgraded Essex Property Trust from Peer Perform to Underperform.
Mid-America Apartment Communities Inc. MAA: He downgraded Mid-America Apartment Communities from Peer Perform to Underperform, while announcing a price target of $137.
UDR Inc. UDR: Rosivach downgraded UDR from Outperform to Peer Perform and announced a price target of $71.
Camden Property Trust CPT: Rosivach downgraded Camden Property Trust from Outperform to Peer Perform.
Shortly after Rosivach’s downgrade, Bank of America Securities analyst Joshua Dennerlein also downgraded Camden Property Trust from Buy to Neutral, while cutting the previous price target from $132 to $121.
The downgrades are interesting because recently these REITs had performed well according to first-quarter operating results and had received favorable ratings from other analysts.
At the end of April, JMP Securities reiterated a Market Outperform on Mid-America Apartment, and RBC Capital Markets maintained a Sector Perform rating on it. Mid-America Apartment increased its first-quarter funds from operations (FFO) from $1.97 to $2.28 year over year, beating its first-quarter 2022 revenue by 11.12% and beating the analysts’ estimates on revenue.
Truist Securities maintained a Hold position on UDR and raised the price target from $43 to $46. UDR’s first-quarter adjusted funds from operations (AFFO) was $0.57, up from $0.55 in the first quarter of 2022.
Recently two other analysts reported favorable views on Camden Property Trust. RBC Capital reiterated an Outperform rating and a $130 price target, and Stifel maintained a Buy rating. Camden Property Trust had a great first-quarter earnings report, as Core FFO more than doubled from $0.76 to $1.66 year over year.
As for Essex Property Trust, in early May, Piper Sandler upgraded Essex Property Trust from Neutral to Overweight and raised its price target from $242 to $271. RBC Capital maintained an Outperform rating and raised its price target from $247 to $250. Essex Property Trust also had a good first quarter, with FFO rising from $3.37 to $3.65 year over year.
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Given the favorable ratings by other analysts, along with good first-quarter earnings and strong performances by the group, why would analyst Rosivach downgrade all four of these apartment REITs?
It was because in looking ahead, he has expectations of an apartment sector slowdown. In his report to clients, he noted, “We think spring rent growth will have a challenging time keeping up with last year's blistering pace."
His forecast for the group is as follows:
- Essex Properties’ leasing spreads are now decelerating, with earnings growth of only 3% this year and 0% in 2024.
- For Camden Property, he sees earnings growth slowing to 6% in 2023 and 3% in 2024.
- UDR is forecast to have 8% growth this year but decline to 3% in 2024.
- Mid-America Apartments should have 2023 earnings growth of 9% but only 2% in 2024.
It’s a brave call since 30-year mortgage interest rates are still in the mid-6 % range, deterring many renters from wanting or being able to buy a home. But 2022 saw large apartment rent increases, and despite cost increases, it will be difficult for landlords to keep tenants in place if they continue to raise rents at that pace. In the first half of 2022, the average price hike for new tenants was 12.2%. The 2022 median U.S. rent was up 5% to $2,305 per month.
Still, Wall Street looks ahead, and many expect mortgage rates to decline if the Federal Reserve rate hikes in a continued effort to temper inflation. Should the economy fall into a recession, the interest rates and home prices would probably decline even further.
For those who own any of these apartment REITs, Monday morning provides a wake-up call to how difficult it can be sometimes to own stocks. Mid-America was down 1.73% in the early going, and Camden Property Trust was down 1.23%. The other two REITs were also trading lower but by smaller amounts.
What should investors do now? They should definitely not panic sell simply because of an analyst downgrade. Continue to do your own research and remember that the best analysts are only correct about half the time. In the example cited before where SL Green dropped to $19.49 following its downgrade, shares rebounded within a few days and by mid-April, SL Green was up near $26 per share. If you still like your stock, stay with it.
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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