REIT Downgrades Increase: Are Analysts Trying To Warn Investors?

When it comes to upgrades, downgrades or changes in price targets, despite their potential to influence markets significantly, the overall predictions of analysts tend to be accurate only about 50% of the time. And that means that just as often, they can be flat-out wrong.

One noteworthy example this year occurred on March 28, when Citigroup maintained its previous downgrade to Sell on SL Green Realty Corp. SLG and slashed its price target from $36 to $17. SL Green had already touched a low of $18.21 two trading days prior to Citigroup's announcement, and Citigroup was expecting even more downside. 

But contrary to Citigroup's prediction, the stock began to rise and has continued to rally for months with its most recent closing price at $35.10.

One of the differences between Citigroup's call on SL Green and a slew of other recent downgrades is that SL Green had been falling in price for months when the new price target was announced. The reason for the erroneous prediction was that it was late, whereas recent downgrades on real estate investment trusts (REITs) are coming after these issues have been rallying for weeks.

From July 10-17, only three REITs were downgraded. But this past week from July 18-24, there were nine. Perhaps analysts are trying to warn investors that with the bulk of REIT earnings reports coming in soon and the recent rally getting long in the tooth, the downside risk is now greater than the potential reward of beating earnings. The prolonged rally may have already priced in positive expectations and share prices have limited upside at this point.

Another concern about these recent downgrades is that they're not focused on one subsector of the REIT market such as office REITs, but instead, they encompass a wide range of subsectors. The recent downgrades are in hotel, residential, specialty, mortgage, retail and healthcare REITs.

On July 20, analyst Tylor Batory of Oppenheimer & Co. Inc. downgraded not just one, but four hotel REITs from Outperform to Perform: Braemar Hotels & Resorts BHR, Chatham Lodging Trust CLDT, Hersha Hospitality Trust HT and RLJ Lodging Trust RLJ. Two weeks earlier, Batory maintained Outperform ratings on all four.  

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Hotel REITs are not the only subsector falling out of favor with analysts. Take a look at some other REITs with huge rallies over the past few months that have been downgraded over the past week.

Arbor Realty Trust Inc. ABR: On July 24, J.P. Morgan analyst Richard Shane downgraded mortgage REIT (mREIT) Arbor Realty Trust from Neutral to Underweight but raised the price target from $11.50 to $13.50. Arbor Realty has rallied from an April low of $9.77 to its recent closing price of $16.54.

Equinix Inc. EQIX: On July 21, Wells Fargo Securities analyst Eric Luebchow downgraded specialty REIT Equinix from Overweight to Equal-Weight and maintained the present price target at $810. Equinix rallied from $656 in March to $807 in July.

Independence Realty Trust Inc. IRT: On July 18, BMO Capital Markets analyst John Kim downgraded residential REIT Independence Realty Trust from Market Perform to Outperform and announced a price target of $19. Independence rallied from $14.29 in March to $17.69 in July.

Essex Property Trust Inc. ESS: On July 18, Stifel analyst Simon Yarmak downgraded residential REIT Essex Property Trust from Buy to Hold but raised the price target from $245 to $250. Essex Property rallied from $191 in March to $245 in July.

PotlatchDeltic Corp. PCH: On July 19, RBC Capital Markets analyst Paul Quinn downgraded specialty REIT PotlatchDeltic Corp. from Outperform to Sector Perform and announced a $55 price target. Quinn said that with PotlatchDeltic's share price rising 23% in recent weeks, he sees limited upside from here.

Three other REITs were also downgraded in the previous week. All of them had produced significant rallies since bottoming in March:

Welltower Inc. WELL: On July 14, Evercore ISI Group analyst Steve Sakwa downgraded healthcare REIT Welltower from Outperform to In-Line and lowered the price target from $82 to $81.

EPR Properties EPR: On July 14, Raymond James analyst RJ Milligan downgraded specialty REIT EPR Properties and announced a $50 price target.

UMH Properties Inc. UMH: On July 12, Wolfe Research analyst Keegan Carl downgraded UMH Properties from Outperform to Peer Perform.

How should investors react to these downgrades? While downgrades are certainly concerning, investors are cautioned to perform their own due diligence before purchasing or selling stocks and not to simply rely upon analysts' upgrades or downgrades to make investment decisions.

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