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Janney upgrades 4 REITs; Boenning initiates Pennsylvania REIT coverage

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Janney upgrades 4 REITs; Boenning initiates Pennsylvania REIT coverage

Upgrades

Janney Montgomery Scott analyst Robert Stevenson said in a Dec. 19 note that real estate investment trusts will be a strong risk-adjusted investment option in 2019, amid domestic and geopolitical uncertainty. Stevenson said his team is more positive on REITs than it has been since 2016, barring meaningful deterioration in the U.S. economy, and highlighted the sector's modest leverage, hard assets and contractual cash flows.

Stevenson upgraded Camden Property Trust to "buy" from "neutral," maintaining a fair value estimate of $99.00 per share. He called the company Janney's top pick in the apartment space, citing its market mix, operating acumen and development pipeline, coupled with an attractive valuation. Stevenson also upgraded Camden's fellow apartment REIT, Essex Property Trust Inc., to "buy" from "neutral," with a $282.00 fair value per-share estimate. He argued that apartments could be one of the few REIT subsectors with accelerating fundamentals in 2019, with new supply declining in 18 of the top 20 markets.

Stevenson upgraded office REITs Douglas Emmett Inc. and Highwoods Properties Inc. to "buy" from "neutral" with fair value estimates per share of $42.00 and $47.00 fair, respectively.

Downgrades

Stevenson's Janney team downgraded Global Medical REIT Inc. to "neutral" from "buy," with a $9.50-per-share fair value estimate. In his note on the sector, Stevenson said rising interest rates historically have hurt healthcare REITs more than REITs that own other property types but observed that the trend has not continued in 2018. Within healthcare, he said, the team has a preference for business models focused on medical office buildings — a property type in which Global Medical invests.

RBC Capital Markets analysts Neil Downey and Michael Smith downgraded Morguard North American Residential REIT to "sector perform" from "outperform," while raising their price target for the company to C$18.00 from C$17.00 per share. They noted that the company has generated a 20% total return in 2018 with "generally good" operating performance and attributed the downgrade to the company's future risk-adjusted return prospects.

Initiation

Boenning & Scattergood analyst Merrill Ross initiated coverage of Pennsylvania Real Estate Investment Trust with a "neutral" rating and no price target. Ross noted that multiple planned anchor-tenant replacements are projected to take effect in the company's portfolio in the 2019 fourth quarter, at rents averaging eight times the previous rates, while a joint venture property redevelopment in Philadelphia is slated to open in September 2019.

"There is a lot riding on this potential cash flow increase because [Pennsylvania Real Estate Investment Trust] is highly levered; missteps are magnified when balance sheets are highly levered and so we are cautious," Ross wrote. Nevertheless, she added, there is potential for a rebound in cash flows over the intermediate term, and significant opportunity for value creation over time.