Parkway Properties is likely to sink when trading begins Thursday after analysts downgraded the company, saying its likely returns to investors do not justify a recent run-up in share price.
The real estate investment trust's property portfolio has improved, but it is unlikely to outperform comparable REITs as much as the share value would suggest, analysts with Cantor Fitzgerald said in a note to clients. They downgraded Parkway to "Sell" from "Hold."
Parkway's price has shot up 13 percent since the start of the year, compared with 5 percent among other office REITs and 4 percent for REITs overall, the analysts said. Parkway gained 68 percent over the past year, and is trading near its highest level since August 2011.
Improvements in the company's portfolio spurred the buy-up, the analysts said. Those improvements caused them to raise their price target from $14 to $15 — still short of Parkway's closing price Wednesday of $15.82.
The stock is now trading at 7.1 percent of its implied cap rate, a measure of the profitability of real estate investments. That appears high, the analysts said. Based on the latest available information about Parkway's leasing activity and property acquisitions, they believe the stock will likely decline in the coming quarters.
Analysts evaluate REITs by trying to project how much money their real estate investments will generate in the near term. Those returns are tied closely to share value, because REITs must return most of their profits to shareholders in the form of dividends in exchange for certain tax exemptions.
The analysts expect Parkway's stock to decline because after recent acquisitions, it relies more heavily on competitive markets like Houston, Phoenix and Charlotte, where profits tend to be narrower.
Parkway, based in Orlando, Fla., invests in and leases office properties mainly in the southeastern and southwestern U.S. and Chicago.
Shares rose 20 cents on Wednesday to $15.82. On Friday, they hit a 52-week closing high of $15.96.