Upgrades
Evercore ISI analysts are making rating changes in the office, retail and self-storage real estate investment trust sectors as they incorporate a higher 3.25% risk-free rate in their REIT valuation framework and reduce their price targets by 2.5%, based on an expected higher 10-year Treasury yield for 2018.
"While we recognize that the bond market will remain volatile near-term and could actually move lower near-term (before moving higher), we believe these valuation changes are more consistent with how investors are thinking about the sector which still appears attractively valued even after incorporating the higher rates," the analysts said in a March 4 note.
The analysts upgraded office REIT Boston Properties Inc. to "outperform" from "in line," while lowering their price target on the stock to $132 per share from $134 per share. The analysts said they believe Boston Properties has an attractive share price even after a price target reduction, and they believe several years of future earnings growth should provide investors with an attractive entry point.
In the retail REIT space, the Evercore team upgraded shopping center landlords Federal Realty Investment Trust and Urban Edge Properties to "in line" from "underperform," with respective price targets of $122 per share and $23 per share, down slightly from $123 per share and $23.50 per share.
The analysts attributed both upgrades to the pullback in certain shopping center stocks and a near- to intermediate-term bias toward those with higher annualized base rent portfolios. The analysts said improved operational performance and less guidance risk at Federal Realty and Urban Edge are likely to bode well for near-term performance in both stocks.
The Evercore analysts changed their outlook on the overall self-storage REIT sector to "market-weight" from "underweight," and upgraded Public Storage to "in line" from "underperform." They increased their price target on the company's stock to $210 per share from $207 per share.
The analysts said they believe that better self-storage trends are in sight despite several quarters of supply pressures, that investor sentiment is likely to improve and that a growth inflection could come in early-to-mid 2019. The analysts said they now expect Public Storage to see same-store net operating income growth of 1.1% and 2.0% for the full year 2018 and 2019, respectively.
In a March 5 note, Baird Equity Research analyst Michael Bellisario upgraded LaSalle Hotel Properties to "outperform" from "in line," and increased the stock's price target to $28 from $27 per share.
Bellisario credited the more positive outlook to his near- to intermediate-term view that sentiment surrounding the stock will improve, with the company's planned dividend cut and sooner-than-expected share buybacks as catalysts. The analyst added that the full-service hotel REIT's implied portfolio valuation of roughly $363,500 per key is "too discounted to ignore, especially from a private market perspective."
Downgrades
In the same March 4 note, the Evercore team downgraded retail REIT Brixmor Property Group Inc. to "in line" from "outperform" with a lower $18-per-share price target, and DDR Corp. and Kimco Realty Corp. to "underperform" from "in line" with reduced stock price targets of $8.50 per share and $16 per share, respectively.
With retail store closures and tenant bankruptcies recently dominating the news, the analysts said they do not see meaningful catalysts in the near term to get all three shopping center stocks to outperform their peers or the overall REIT index.
In the office sector, the Evercore team downgraded Paramount Group Inc. to "in line" from "outperform" and SL Green Realty Corp. to "underperform" from "in line." The per-share stock price targets on Paramount Group and SL Green were reduced to $16.50 and $105 from $17.50 and $108 per share, respectively.
On Paramount Group, the analysts argued that the stock has remained cheap even after the company successfully leased up its portfolio, which they had initially thought to be a positive catalyst for the stock.
The SL Green downgrade, on the other hand, is purely driven by valuation as the stock has drifted lower over time despite demonstrating meaningful outperformance year-to-date, the analysts said. The team also questioned the company's ability or willingness to expand its repurchase authorization without taking up leverage or selling additional assets.
Reiteration
Mizuho Securities USA LLC analyst Richard Anderson on March 4 reiterated his "neutral" rating on LTC Properties Inc., while lowering his stock price target to $41 per share from $51 per share.
Anderson said he believes the healthcare REIT has managed well around several tenant stresses that have caused headwinds for other REITs. The company, however, offered well-below-consensus earnings guidance for 2018, which the analyst said might be related to issues facing its two tenants, Anthem Memory Care and Sunrise Assisted Living.
