Investing

Why This Wall Street Analyst Is Pumping the Brakes on These 4 REIT Stocks

Chris Lange

Published: June 1, 2022 10:40 am

Real estate investment trust (REIT) stocks have been one of the most popular vehicles for investment over the past few weeks as markets have been turning lower. While last week broke the recent trend, it is unclear whether we are in a bear market rally. As more questions are raised about the current direction of the market going into the summer, one more Wall Street analyst is taking a stance on REITs.

BMO Capital Markets recently issued a few REIT-focused calls. Although these stocks have been beaten up over the past few months, this firm suggests they are due for a turnaround, while adjusting for their current position.

Real estate is considered to be one of the best assets for making money over time, whether it is through commercial or residential avenues. Most investors cannot buy large swaths of properties, but they can buy into REITs that are targeted for certain real estate assets. Owning a home technically makes one a real estate investor. However, home ownership does not produce any income, except for rental properties, which can be very capital intensive, not to mention time-consuming.

Many investors are concerned that REITs will get hit hard in a rising interest rate environment. The Federal Reserve recently raised the federal funds rate by 50 basis points, and many expect similar or even bigger hikes coming this month and next, as well as in the rest of the year.

In the past, REITs have performed well in rising long-term interest rate environments. For instance, REITs outperformed the S&P 500 in roughly half the periods when Treasury yields were rising, and this positive momentum has been consistent with an improvement in underlying fundamentals.

It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

JBG Smith Properties

JBG Smith Properties (NYSE: JBGS) owns, operates and invests in high-growth mixed-use properties in and around the District of Columbia. BMO Capital Markets downgraded it to Market Perform from Outperform and cut the $38 price target to $30. That still implies upside of 14% from the most recent closing price of $26.22.

The stock has a 52-week trading range of $23.54 to $34.98, and it traded near $26 a share early Wednesday. The dividend yield is 3.5%. The stock is down about 10% year to date.

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Vornado Realty Trust

BMO Capital Markets downgraded Vornado Realty Trust (NYSE: VNO) to Market Perform from Outperform, and it cut the $52 price target to $40. This implies upside of 12.5% from the most recent closing price of $35.54. Vornado’s real estate portfolio is primarily concentrated in New York City, but it does have some key assets located in Chicago and San Francisco.

Vornado Realty Trust stock was trading around $35  on last look, in a 52-week trading range of $32.48 to $50.91. The dividend yield is 6.0%. Shares are down nearly 16% year to date.

Kilroy Realty

Kilroy Realty Corp. (NYSE: KRC) is another REIT with its portfolio primarily located on the west coast, namely in San Diego, Los Angeles and San Francisco. The firm’s portfolio is mainly focused on office space and life science space, with just a few retail units. BMO Capital Markets lowered its Outperform rating to Market Perform and cut the price target to $70 from $84. The implied upside from the most recent closing price of $61.96 is 13%.

The 52-week trading range is $56.94 to $79.06, and shares traded over $60 Wednesday morning. It has a dividend yield of 3.4%. Shares are down about 9% year to date.

Essex Property Trust

Essex Property Trust Inc. (NYSE: ESS) is slightly different from the rest of these REITs as its focus is mainly on residential properties in select west coast markets. The BMO Capital Markets downgrade to Market Perform from Outperform included a price target cut to $320 from $378. This implies upside of 11% from the most recent closing price of $288.69.

The stock traded around $284 early Wednesday, and it has a 52-week trading range of $275.33 to $363.36. The dividend yield is 3.1%, and the stock is down 19% year to date.