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Analyst downgrades hurt.
Investors can awaken any morning to find one of their stocks down heavily following an analyst downgrade. The stock may retreat even further as word spreads.
Often it’s a reaction to a stock that has run up and seems overbought. But other times, as with many real estate investment trusts (REITs) in 2022, the downgrades come after a stock has already been clobbered.
The two REITs below received downgrades from multiple analysts within the past few weeks. But are these downgrades deserved? Take a look and decide for yourself.
AvalonBay Communities Inc. AVB is a residential REIT that acquires, develops and manages multifamily communities. As of Sept. 30, 2022, AvalonBay Communities owned directly or indirectly 88,405 apartments in 293 communities across 12 states and Washington, D.C. The 52-week range is $158.35 to $259.05, and the most recent closing price was $168.79.
AvalonBay Communities has had a successful 24 years, averaging 8.5% total returns annually. Despite this worthy record, it’s had several recent analyst downgrades.
On Dec. 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 next day, Goldman Sachs analyst Chandni Luthra downgraded AvalonBay Communities from Buy to Neutral, while lowering its price target from $197 to $187.
On Dec. 16, JPMorgan downgraded AvalonBay Communities from Neutral to Underweight and lowered the price target from $206 to $197.
These downgrades were initiated despite AvalonBay Communities having posted third-quarter funds from operations (FFO) of $2.50, an increase of 21% from the third quarter of 2021. Revenue also increased by 14.5% from the third quarter of 2021.
Looking ahead, analysts are worried about the Federal Reserve creating a recession in 2023 from the ongoing increases in interest rates. Rental rates have already begun to soften, but that’s following a major increase over the past two years.
Another factor for the downgrades was that AvalonBay Communities revised its 2022 core FFO from its previous $9.76 to $9.96 to a lower range of $9.74 to $9.84.
AvalonBay Communities has been able to shrug off these analyst downgrades with its share price up about $2 since the Dec. 7 downgrade.
SL Green Realty Corp. SLG is the largest owner and landlord of New York City office buildings, holding an interest in 62 buildings totaling 33.6 million square feet.
SL Green Realty recently cut its monthly dividend 12.9%, from $0.3108 to $0.2708, but the annual yield is still 9.1% and the dividend/FFO payout ratio is only about 55%. Recent third-quarter earnings and revenue were also well below the third quarter 2021.
SL Green Realty had already lost almost half its value in 2022, but that didn’t stop multiple analysts from recently downgrading it further.
On Dec. 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. 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 high leverage and downside earnings risk, he expects future dividend cuts are likely.
Within two days of the downgrades, SL Green Realty dropped another 8%. So unlike AvalonBay Communities, SL Green was unable to shrug off the analyst downgrades.
On Dec. 13, Nicholas Joseph of Citigroup also downgraded SL Green Realty from Neutral to Sell, while lowering the price target from $35 to $30.
But SL Green Realty has some positive news of late. It recently celebrated the topping out —when the last beam is placed on a building during construction — of One Madison Avenue. The building is 55% preleased, with construction expected to be completed next November.
SL Green Realty recently partnered with Caesars Entertainment to bid on redeveloping 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 stock price much higher.
Investors should keep in mind that analysts are not always right, but they can have an effect upon share prices.
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