3 REITs With Upgrades Before The Fed Meeting

The onset of multiple rate hikes by the Federal Reserve in the early spring of 2022 has proven to be a difficult headwind for interest-sensitive assets such as real estate investment trusts (REITs) to overcome. Two reasons REITs struggle in rising interest rate environments are that borrowing money to fund acquisitions becomes more expensive, and Treasury bonds and CDs become lower-risk alternatives for investors seeking income.

With the Federal Reserve scheduled to meet this week, you might not expect to see several REITs receiving upgrades before the meetings. Yet, the week began with just that scenario. Take a look at three REITs that just received analyst upgrades:

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Kimco Realty Corp. KIM is a Jericho, New York-based retail REIT that owns and operates 528 open-air, grocery store-anchored and unanchored properties with 90 million square feet of leasable space and ground leases. Its properties are located on the East and West coasts, Texas and Colorado.

Kimco Realty was founded in 1958, is a member of the S&P 500 and has been publicly traded on the New York Stock Exchange (NYSE) since 1991. Second-quarter pro-rata occupancy was 95.8%.

On Sept. 18, Mizuho analyst Haendel St. Juste upgraded Kimco Realty from Neutral to Buy, while lowering the price target from $21 to $20.

August was a busy month for Kimco Realty. On Aug. 29, Compass Point Research & Trading analyst Floris Van Dijkum upgraded Kimco Realty from Neutral to Buy and announced a $22 price target.

On Aug. 28, Kimco Realty announced the acquisition of RPT Realty in an all-stock transaction for approximately $2 billion, including the assumption of debt and preferred stock.

On Aug. 25 Kimco also announced the purchase of the Potomac Town Center, a grocery-anchored lifestyle center in Virginia, for $172.5 million. The 504,000-square-foot center has a diverse tenant mix and is 96% occupied.

AGNC Investment Corp. AGNC is a Bethesda, Maryland-based internally managed mortgage REIT (mREIT) that invests in U.S. government-guaranteed pass-through securities and collateralized mortgage obligations.

AGNC Investment Corp has a market cap of $6.1 billion, total assets of $58 billion and has been in business for 15 years. It invests predominantly in agency residential mortgage-backed securities (MBS).

On Sept. 18, UBS analyst Vilas Abraham upgraded AGNC Investment from Neutral to Buy and raised the price target from $10.50 to $11.50.

On Sept. 12, AGNC announced a monthly dividend of $0.12, in line with its previous dividend. Payment will be on Oct. 11 for stockholders as of Sept. 29, with an ex-dividend date of Sept. 28. The $1.44 annual dividend yields 14.2%.  

Despite the lofty dividend yield, the payout ratio on the forward earnings per share (EPS) of $2.56 is only 56.25%, so the dividend appears to be safe at present.

Annaly Capital Management Inc. NLY is a New York-based mortgage REIT that invests in mortgage-backed securities to loan money on residential properties backed by Fannie Mae, Freddie Mac or Ginnie Mae. Annaly Capital Management's market capitalization is $10.16 billion. It has total assets and capital of $79 billion and has been in business for over 25 years. Its investment strategies include agency mortgage-backed securities, mortgage servicing rights and residential real estate.

On Sept. 18, UBS analyst Brock Vandervliet upgraded Annaly Capital Management from Neutral to Buy and raised the price target from $21 to $24.

On Sept. 7, Annaly Capital Management announced a quarterly dividend of $0.65, in line with its previous dividend. Payment will be on Oct. 31 for stockholders as of Sept. 29, with an ex-dividend date of Sept. 28. The $3.06 annual dividend yields 14.8%. However, unlike AGNC, Annaly is paying out more on its forward annual dividend than the forward EPS of $2.92. That increases the risk of future dividend cuts, something that Annaly has done three times over the past five years.

The two mREIT upgrades likely indicate analysts' assumption that Fed interest rate hikes will soon be coming to an end. Wall Street has overwhelmingly factored in the Fed leaving rates alone in September, yet still believes another rate hike may be forthcoming in November. But with oil prices rising again and gasoline prices spiking higher, this inflation cycle could surprise the markets by staying around longer than the current thinking.

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