Analyst downgrades hurt.
Investors can wake up every morning to find that one of their stocks has fallen heavily after an analyst downgrade. Shares may retreat even further as news spreads.
Often it is in response to a stock that has run up and appears overbought. But other times, like many real estate investment trusts (REITs) in 2022, the downgrades come after a stock has already taken a beating.
The two REITs below have received downgrades from multiple analysts in recent weeks. But are these downgrades deserved? Take a look and decide for yourself.
AvalonBay Communities Inc. (NYSE: AVB) is a residential REIT that acquires, develops and manages multifamily communities. As of September 30, 2022, AvalonBay Communities owned directly or indirectly 88,405 apartments in 293 communities in 12 states and Washington, DC. The 52-week range is $158.35 to $259.05, and the most recent closing price was $168.79.
AvalonBay Communities has had 24 successful years with an average total return of 8.5% per annum. Despite this worthy record, it has recently suffered several downgrades from analysts.
On December 7, analyst Adam Kramer of Aperture Investors downgraded AvalonBay Communities from Overweight to Equal-Weight while lowering his price target from $225 to $187. The following day, Goldman Sachs analyst Chandni Luthra downgraded AvalonBay Communities from Buy to Neutral while lowering its price target from $197 to $187.
On December 16, JPMorgan downgraded AvalonBay Communities from Neutral to Underweight and lowered its price target from $206 to $197.
These downgrades were initiated despite AvalonBay Communities posting a $2.50 Fund from Operations (FFO) in Q3, up 21% from Q3 2021. Revenue also increased by 14, 5% compared to the third quarter of 2021.
Looking ahead, analysts worry that the Federal Reserve will trigger a recession in 2023 due to continued rate hikes. Rents are already falling, but that follows a large increase in the past two years.
Another factor for the downgrades was that AvalonBay Communities revised its core FFO for 2022 from the previous $9.76 to $9.96 to a lower range of $9.74 to $9.84.
AvalonBay Communities has been able to shake off these analyst downgrades with its share price up about $2 since the December 7 downgrade.
SL Green Realty Corp. (NYSE: SLG) is the largest owner and lessor of office buildings in New York City, with interests in 62 buildings totaling 33.6 million square feet.
SL Green Realty recently cut its monthly dividend by 12.9%, from $0.3108 to $0.2708, but the annualized return is still 9.1% and the dividend/FFO payout ratio is only about 55%. The recent third quarter earnings and revenue were also well below the third quarter of 2021.
SL Green Realty had already lost nearly half of its value by 2022, but that hasn’t stopped several analysts from lowering it further recently.
On December 6, John Kim of BMO Capital Markets downgraded SL Green Realty from Outperform to Market Perform and lowered his price target from $47 to $41. On the same day, Nicholas Yulico of Scotiabank downgraded SL Green Realty from Sector Perform to Sector Underperform and lowered the price target from $43 to $34. Yulico said that given the high leverage and downside earnings risk, he expects future dividend cuts to be likely.
Within two days of the downgrades, SL Green Realty was down another 8%. So unlike AvalonBay Communities, SL Green couldn’t shake analyst downgrades.
On December 13, Citigroup’s Nicholas Joseph also downgraded SL Green Realty from Neutral to Sell while lowering its price target from $35 to $30.
But SL Green Realty has had positive news lately. It recently celebrated the pinnacle—when the last beam is placed on a building during construction—of One Madison Avenue. The building is 55% cleared and construction is expected to be completed in November.
SL Green Realty recently teamed up with Caesars Entertainment to bid to redevelop a 54-story building in Times Square to house a new casino and theater. If SL Green Realty wins that bid, it could propel the share price much higher.
Investors should keep in mind that analysts are not always right, but they can influence stock prices.
Weekly REIT Report: REITs are one of the most misunderstood investment options, making it difficult for investors to spot incredible opportunities until it’s too late. Benzinga’s in-house real estate research team has worked hard to identify the biggest opportunities in the current market, which you can access for free by subscribing to Benzinga’s weekly REIT report.
Latest news about Benzinga real estate
Don’t miss real-time alerts about your stocks – join Benzinga Pro for free! Try the tool that helps you invest smarter, faster and better.
© 2022 Benzinga.nl. Benzinga does not provide investment advice. All rights reserved.