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Bank of Americas Securities turned more bearish on commercial real estate ("CRE") mortgage REITs as analyst Eric Dray expects CRE headwinds to persist in 2024.
The analyst donwgraded Ares Commercial Real Estate (NYSE:ACRE) to Underperform from Buy, and TPG RE Finance Trust (NYSE:TRTX) and BrightSpire Capital (NYSE:BRSP) to Underperform from Neutral.
TPG RE Finance (TRTX) stock slumped 4.0%, BrightSpire (BRSP) slid 3.9%, and Ares Commercial (ACRE) dipped 1.8% in Monday premarket trading.
He expects that the next few quarters "may be choppy" with risks to the downside. For ACRE and BRSP, Dray points to their high office exposures. For TRTX, he sees its dividend at risk due to a 30% decline in its portfolio size, which reduces its earnings potential.
He credits TRTX for cleaning up its legacy loan book, but "we think more credit issues may arise given the difficult backdrop for CRE and want to see several quarters of solid credit before we declare TRTX 'all clear' on credit." Still, BofA raised its price target on TPG RE Finance to $6.50 from $6.00.
BrightSpire (BRSP) also has multifamily exposure, and has a high proportion of loans that originated at historically low rates, Dray wrote in a note to clients. Office, the most stressed sub-sector of CRE, represents 33% of its portfolio and Sunbelt multifamily properties represent 41%. An oversupply of multifamily properties in that region has hurt rental incomes, he noted. BofA maintained its price target at $6.50.
At Ares Commercial (ACRE), office properties represent 39% of its portfolio. "Additionally, 46% of ACRE's portfolio is set to mature in 2024 (and another 43% in '25) and we think borrowers may have difficulty refinancing loans due to higher rates and lower valuations," Dray said. Price target moved to $7.00 from $11.00.