A Bank of America analyst has changed his initial ratings on five real estate investment trusts: three are healthcare REITs and two are residential REITs. In comparing the REIT sectors, SP Global reported that healthcare REITs have an average 10-year return of 11.6%, while residential REITs tout a return of 16.7%.
Meanwhile, healthcare REITs have a higher five-year average dividend yield of 5.2%, compared to an average yield of 2.9% for residential REITs.
The Bank of America Analyst
- Bank of America analyst Joshua Dennerlein upgraded Veris Residential (NYSE:VRE) from Underperform to Neutral and raised the price target from $16 to $18.
- Dennerlein upgraded Medical Properties Trust (NYSE:MPW) from Neutral to a Buy with a price target of $16.
- He downgraded Essex Property Trust (NYSE:ESS) from a Buy to Neutral and reduced the price target from $265 to $233.
- The analyst downgraded Omega Healthcare Investors (NYSE:OHI) from a Buy to Neutral and dropped the price target from $35 to $33.
- Dennerlein downgraded Sabra Health Care REIT (NASDAQ:SBRA) from Neutral to Underperform and lowered the price target from $15 to $13.
Veris Residential Upgraded: After Veris Residential announced the sale of its office properties including Harborside 1, 2 and 3 for roughly $420 million, it has largely completed its transformation to a pure-play multifamily REIT, the analyst noted.
Dennerlein thinks that Veris will unlock future value as the portfolio exposure to multifamily increases, now representing 98% of the net operating income. Bank of America’s $18 price target reflects a 10% discount on its NAV to reflect execution risk on refinancing the Rockport JV preferred equity investment, which is the next positive catalyst for Veris to unlock more value.
Medical Properties Trust Upgraded: Dennerlein reported that the current valuation of the stock more than offsets any risk inherent in the firm's portfolio.
Positive catalysts for Medical Properties Trusts include the Steward ABL to be permanently extended in December, tenants should start to see improving fundamentals from payer rate hikes, improving labor markets and slowing inflation, and a pivot to a more dovish Fed is a positive for this high yielding REIT, the analyst noted.
Dennerlein is also bullish on Medical Properties given that inflation can accelerate internal growth as the vast majority of its lease escalators are linked to the consumer price index.
Essex Property Trust Downgraded: The analyst reported that the downgrade was due to concerns about the West Coast markets of Northern California and Seattle weakening in the months to come.
With over 52,000 workers in the U.S. technology sector laid off in 2022, primarily in California, Dennerlein expects this trend to grow as the state has a heavy concentration of tech jobs.
The analyst's downgrade is driven by the view that tech job losses will continue to worsen, as AvalonBay Communities (NYSE:AVB) and Equity Residential (NYSE:EQR) have also reported price sensitivities in their Northern California and Seattle portfolios.
Omega Healthcare Investors Downgraded: The downgrade can be attributed to poor coverage ratios from Omega Healthcare’s operators offsetting the view that selling Agemo's assets (not paying, roughly 6% of the portfolio) and recycling proceeds will significantly lift earnings in 2023, Dennerlein reported.
The analyst said that new risk emerged in the third quarter as the top tenant, La Vie (9.9% of total rents), has slipped to an EBITDAR coverage ratio under 1x, and the total portfolio coverage below 1x is 38.4%. Lastly, as the pandemic comes to an end it is a key negative for Omega’s Texas exposure (10.5% of the portfolio), Dennerlein noted.
Sabra Health Care REIT Downgraded: The analyst said that the third quarter earnings call provided little clarity and opened questions on how strong Sabra Health Care’s lease agreements with tenants are, as the earnings growth trajectory is less attractive than peers.
Additionally, Dennerlein mentioned that it is puzzling that Sabra Health would transition a portfolio with a healthy coverage (1.43x EBITDARM) to new operators and provide a rent cut.
The analyst expects the possibility of rent relief for some of its net lease tenants and the cost of capital to remain impaired, which will make growth from acquisitions more challenging.
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