Amid warnings for the sector, these 11 commercial REIT stocks are loved by analysts, who see upside of up to 47%

On Monday, a group of analysts at BofA Securities led by Camille Bonnel wrote that REITs that own office buildings had declined 70% in value “as public markets have been pricing in secular headwinds and tight lending conditions” since the beginning of the Covid-19 pandemic in 2020.

Read: Office property woes could be tip of iceberg if credit freezes up as $1 trillion bill comes due

On Monday, Adam Posen, president of the Peterson Institute for International Economics, said the commercial real estate space was heading into a “real mess,” in part because office occupancy was down 30% to 40% since the pandemic began.

Back on March 7, analysts at Keefe, Bruyette and Woods predicted “no soft landing for CRE,” especially in particular markets, including San Francisco, New York, Washington D.C., Seattle, Austin, Texas, and Phoenix. In a report highlighting risks for REITs and banks, the KBW analysts added: “With $400bn of annual loan maturities, we expect increasing credit issues as borrowers evaluate capital and lenders become defensive; our framework implies 1-3% loan losses.” They expect office building values to decline 30% or more, with those values “30 to 50% into correction.”

The BofA analysts provided some comfort for REIT investors: “Most REITs tend to own top-quartile properties and follow an active, hands-on ownership model. Historically, public REITs outperform within their markets particularly in tougher market conditions like today.”

CRE REIT screen

To highlight which REITs focused on commercial real estate (CRE) might fare best, we began with the 180 REITs in the Russell 3000 Index and then narrowed the list.

First, there is a distinction between equity REITs, which own properties and rent them out, and mortgage REITs, which are lenders and investors in mortgage-backed securities.

And now for the cuts:

• First we narrowed the list to 133 commercial equity or commercial mortgage REITs.

• Then we removed any covered by fewer than five analysts polled by FactSet. This reduced the list to 107 companies.

• We removed any whose estimated dividend for 2023 was less than its prepandemic payout, based on the annual dividend rate at the end of 2019. This cut the list to 60 companies, of which six were commercial mortgage REITs, while the rest were commercial equity REITs.

• For the remaining equity REITs, we removed any for which estimated 2024 AFFO (defined below) was lower than estimated AFFO for 2023. This reduced the list to 56 companies.

• For the six remaining commercial mortgage REITs, for which neither AFFO or FFO estimates were available, we removed the three for which consensus 2024 earnings-per-share estimates were lower than their consensus 2023 EPS estimates. This brought the list down to 53 companies.

AFFO is adjusted funds from operations — a non-GAAP calculation. In the REIT industry, FFO adds depreciation and amortization back to earnings, while subtracting gains on the sale of property. Adjusted FFO goes further, netting out expected capital expenditures to maintain the quality of property investments. For commercial mortgage REITs, FFO isn’t typically calculated, so we looked at EPS instead.

Among the remaining 53 companies, 11 are rated “buy” or the equivalent by at least three-quarters of the analysts covering them. Here they are, sorted by the upside potential implied by consensus price targets among analysts polled by FactSet:

Click on the tickers for more about each REIT. If you are interested in any individual stock, it is best to do your own research and form your own opinion about how successful a company is likely to be over the next decade at least.

Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

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