BofA Securities Downgraded These 3 Office REITs
The office real estate investment trust (REIT) sector, which has suffered through a harsh bear market since the beginning of 2022, continues to face difficulties with declining occupancy levels and higher expenses. This week, BofA Securities analyst Camille Bonnel downgraded three of the weakest office REITs in the subsector.
"For all three of these office REITs, more than a quarter of their leases expire through 2025, which implies higher leasing costs dragging on cash flows," Bonnel said.
Take a look at three REITs that the analyst just downgraded but note that another analyst who covers the same REITs does not always concur with her view.
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Highwoods Properties Inc. (NYSE:HIW) is a Raleigh, North Carolina-based office REIT that purchases, leases and manages properties in eight strong but smaller markets throughout the Southeast U.S. Its client base includes the federal government, Bank of America and MetLife Inc. Highwoods Properties is a member of the S&P Midcap 400 Index.
Highwoods Properties owns 28.5 million square feet of leasable space. As of Sept. 30, its portfolio had an 88.7% occupancy rate with weighted average lease terms (WALT) of six years.
On Oct. 24, Highwoods Properties reported third-quarter earnings. Funds from operations (FFO) of $0.93 per share was in line with estimates but down 10.5% from FFO of $1.04 per share in the third quarter of 2022. Revenue of $207.09 million beat the consensus estimate of $206.88 million and was slightly ahead of $207 million in the third quarter of 2022.
Highwoods modified its FFO guidance for full-year 2023 from $3.69-$3.81 to $3.73-$3.77, essentially keeping the same midpoint of $3.75 per share.
On Nov. 13, BofA Securities Bonnel downgraded Highwoods Properties from Buy to Neutral and lowered the price target by 31% from $29 to $20.
This was similar to Mizuho analyst Vikram Malhotra, who maintained a Neutral rating on Highwoods Properties on Oct. 18, while lowering the price target from $31 to $24.
Paramount Group Inc. (NYSE:PGRE) is a New York-based office REIT with 17 properties divided between New York City and San Francisco. Founded in 1978, Paramount provides asset management, leasing, redevelopment and financing.
On Nov. 1, Paramount Group reported its third-quarter operating results. FFO of $0.21 per share missed estimates of $0.22 per share and was below FFO of $0.24 in the third quarter of 2022. Revenue of $189.18 million beat the analyst estimates of $182.27 million and was a slight improvement from the third quarter of 2022 revenue of $187.15 million.
On Nov. 13, Bonnel downgraded Paramount Group from Neutral to Underperform and lowered the price target from $5 to $4.
But Malhotra disagrees. On Oct. 18, Malhotra maintained a Buy rating on Paramount Group while lowering the price target from $7 to $6.
Hudson Pacific Properties Inc. (NYSE:HPP) is a Los Angeles-based office REIT with 51 office properties and four studio properties with an emphasis on centers of innovation for media and tech companies in California, Washington and Vancouver, British Columbia. Its office occupancy rate is 87%
Hudson Pacific Properties was founded in 2006 by Chairman and CEO Victor Coleman. Soon after its creation, it began purchasing motion picture studios and office buildings on the West Coast. Hudson Pacific Properties went public in 2010. The 52-week range is $4.05 to $12.23.
On Nov. 1, Hudson Pacific reported its third-quarter earnings. FFO of $0.20 per share was in line with analyst estimates but well below FFO of $0.52 in the third quarter of 2022. Revenue of $231.44 million missed estimates of $238.37 million and was 11.1% below revenue of $260.35 million in the third quarter of 2022.
On Nov. 13, Bonnel downgraded Hudson Pacific Properties from Neutral to Underperform.
But not all analysts agree. On Nov. 10, Piper Sandler analyst Alexander Goldfarb maintained an Overweight position on Hudson Properties but lowered the price target from $9 to $8. On Oct. 18, Malhotra upgraded Hudson Pacific from Underperform to Neutral and announced a $7 price target.
The recent strikes of both the actors and writers hurt Hudson Pacific's bottom line in 2023, but with those strikes over, that should help Hudson Pacific's bottom line in future quarters.
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