STIFEL: Healthcare REITs - NIC Conference Fall 2016 - Key Takeaways

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NIC Conference Fall 2016 - Key Takeaways

• We attended the 2016 Fall NIC Conference (September 14 & 15) in Washington D.C. where we met with seniors housing operators, healthcare REITs and property owners as well as capital providers and industry figures. Here we summarize some of the themes discussed and give some key meeting takeaways from seniors housing and REIT management teams.

• Seniors housing supply remains the topic du jour. Many operators we spoke to are understandably concerned about rising supply in the industry. A key difference we see between this year's conversations and the prior year is that many of the private operators we've spoken to are seeing supply impact their business personally, not just in the national headlines or competitors. Despite the supply issues, operators largely remain cautiously optimistic on seniors housing outlook.

• As a response to the wave of new development, it appears that lenders are tightening standards of lending to developers, which could slow future development and help to bring supply back in line with demand. We noticed fewer developers at this conference than in the past.

• Discounting rate seems to be a tool that operators are widely using to attract new residents and prop up occupancy. On average, the discount equates to one month's rent, but may take the form of a waiver in community fee, first month free or other discounts.

• Labor cost inflation complicates matters. Rising minimum wages, increased threshold for full-time vs. hourly employees and competition in a tight labor market mean that labor expense growth may outpace revenue growth, especially on the coasts.

NIC Conference Meeting Takeaways - Fall 2016

CareTrust (CTRE, $14.22, Hold)

• Continues to find small portfolios in secondary markets to execute sale leaseback transactions with quality operators.
• Has the capacity to do and has looked at larger deals, but small deals still move the needle.
• Open to SNF acquisitions but with operators other than Ensign as diversification of operator base is still a priority.
• Believes secondary and tertiary markets like Iowa, Nebraska and other Middle America states, are less impacted by change to value-based systems due to lower competition.

New Senior (SNR, $11.30, Hold)

• Believes there is an abundance of capital in the space looking for yield, especially private equity formed capital.
• Believes the gap between buyer and seller expectations is narrowing, but transactions are taking longer to close than historically.
• Believes HCREITs are largely being more selective in the deals they pursue.
• Seeing operators using incentives such as reduction of one-month non-refundable deposit to drive occupancy.
• Expects to close on some dispositions in the fourth quarter.

Sabra (SBRA, $23.42, Hold)

• Bulk of the SBRA owned GEN operated assets being marketed (19 of 29) are located in Kentucky. The balance is located amongst six other states, primarily Midwest.
• Seniors housing pipeline is active, primarily secondary markets with yields in the 7% range.
• Expects rent coverage ratio to stabilize and largely be flat over the next 12 months.
• Seeing foreign investors interested in SNF JVs as they are attracted to the yield.

Brookdale (BKD, $17.31, Hold)

• Announced dispositions should close by year end 2016 barring any licensing issue delays. The remaining dispositions are primarily legacy Emeritus assets.
• Management believes the market is active with buyers as smaller players are looking to build out portfolios.
• Using a discounting strategy to improve occupancy for facilities with lower occupancy; the incentives are not typically offered at high occupancy facilities.
• Houston and San Antonio have been identified as challenging markets.

HCP Inc. (HCP, $37.03, Sell)

• Looking to reduce senior housing portfolio as a % of total (currently 50%) as well as BKD exposure (post-spin 34%). Target exposure to BKD is around 20%. Will be selective in senior housing acquisitions.
• Concurrently, would like to grow its RIDEA portfolio and add new operating partners. Cap rates on new HCP RIDEA transactions are 6% to 7% range.
• Interested in growing MOB portfolio. This is likely to involve higher volume of smaller transaction rather than larger portfolio transactions.
• Spin-co has begun marketing its capital structure to investors.

Welltower (HCN, $73.61, Buy)

• Actively marketing $500M to $1.0B of GEN assets. Expects to meaningfully reduce GEN exposure over the next 12 months.
• Pursuing acquisitions in the senior housing and MOB spaces. Given high valuations of MOB space, HCN will grow through one-off transactions and with existing partners via development opportunities.
• The company has limited interest in life science or hospital assets.

LTC Corp (LTC, $50.59, Hold)

• With $82M in transactions closed YTD, LTC believes it can hit $100M by year-end.
• Observes increased interest in smaller deals in the market, which is consistent with what we’ve heard at the conference. LTC is currently underwriting new SNFs at 8.0% to 8.5% and private pay senior housing at ~7%
• Management is confident in the stability of its operators.
• Management anticipates renewing its Sunrise master lease in line with the current lease.

Capital Senior Living (CSU, $17.06, Hold)

• Optimistic that three transactions that were delayed for either licensing or labor issues will close before year-end.
• Experienced lower wage inflation relative to peers due to the lower level of care provided and the geography of CSU facilities.
• Expects operations to bounce back after a weak 2Q. Management not seeing supply in its markets as a concern.

NOMURA JAPAN DAILY SUMMARY & RESEARCH - REITS

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Near-term earnings likely to depend on real estate sales and condo business 
Tokyu Fudosan Holdings has no major projects under development for long-term holding and rental until the planned completion of the Shibuya Dogenzaka 1-chome and Shibuya Nanpeidai projects in 20/3 and the Takeshiba and Shibuya Station Sakuragaoka Exit projects in 21/3. We expect the company to sell Yokohama Minatomirai 21-32, which is being developed near condominiums and slated for completion in 18/3. After completion, we expect a stable contribution to profit growth from the sale of the Higashi Ikebukuro 1-chome Cinema Complex, a project in which the company disclosed its involvement on 9 August 2016, as well as retail stores, restaurants, and business hotels in Futako Tamagawa, Ginza 1-chome, Shimbashi 3-chome, and Osaka Shinsaibashi 2-chome. Our views are unchanged, and we maintain our forecasts, target price, and Buy rating. Our target price is based on NAV calculated from a cap rate of 4.3%, and the shares look undervalued considering the implied cap rate of 5.3% based on the 8 September closing price.

Janney/REITs: Weekly REITCap: Portfolio Managers Guide to Property REITs

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Weekly REITCap: Portfolio Managers Guide to Property REITs – September 9, 2016

Our Weekly REITCap Portfolio Managers Guide provides general corporate information, total returns, valuation and balance sheet measures for 150+ property REITs across the major asset types (e.g. office, multifamily, retail, industrial), as well as more esoteric REITs (such as the prisons and towers).

For the week ending September 8, the MSCI US REIT Index (RMZ) return was +0.9% versus the S&P 500 return of +0.5%. The NASDAQ was +0.6%, the DJIA was +0.3%, the Russell 2000 was +1.5%, the DJ Utilities were +2.6%, and the S&P Financials were +0.2%. The best-performing REIT subsectors last week were Data Centers and Towers (+2.3%), Triple-Net Lease (+2.2%), and Office-Suburban (+2.1%), while the worst were Hotels (-2.7%), Storage (-0.6%), and Apartments (-0.1%). The best-performing REIT stocks last week were GEO (+10.6%), IRT (+6.8%), and MNR (+5.4%), while the worst were CMCT (-8.2%), AHT (-5.0%), and HST (-4.3%). .

YTD REITs are now outperformingthe S&P 500 by 640bps. The REIT sector is now +14.8% in 2016, while the S&P 500 is +8.4%, both on a total return basis. YTD the Russell 2000 total return is +10.8%, the NASDAQ is +5.0%, the DJIA is +6.1%, the DJ Utilities are +18.0%, and the S&P Financials are +3.9%. The best-performing REIT subsectors YTD are Triple-Net Lease (+34.0%), Industrial (+32.2%), and Healthcare (+25.4%), while the worst are Storage (-8.3%), Apartments (+0.2%), and Single-Family Rentals (+2.6%). The best-performing REIT stocks YTD are SNH (+70.2%), GOV (+65.1%), and NXRT (+62.6%), while the worst are CXW (-37.4%), GEO (-19.8%), and NYRT (-14.3%). .

Over the past 12 months, the REIT sector total return is +27.9%, while the S&P 500 is +13.2%. Over the last 3 months, the REIT sector total return is +6.5%, while the S&P 500 is +3.5%. The US is outperformingmany of the major global real estate markets YTD. The YTD US REIT total return of +14.8% compares to +1.8% for Europe, +12.2% for Asia, -6.8% for the UK, and +15.6% for Australia. REIT sector’s average cash dividend yield is 3.7%. This compares to the average yields on the 10-year Treasury (1.6%) and Moody’s Baa Corporate Bond Index (4.2%). .

We remain Neutral on the US Property REITs. With a 10% total return expectation for 2016, we remain Neutral on the US Property REITs, as solid internal growth and continued access to inexpensive and plentiful capital are somewhat offset by strong valuations, greater levels of new supply, and the threat of higher interest rates. In terms of our subsector views, we are positive on the Multifamily, CBD Office, and Industrial subsectors; neutral on Data Centers, Regional Malls, Self-Storage, Shopping Centers, Student & Manufactured Housing, Tower, and Triple-Net; and negative on Diversified, Healthcare, Hotels, Suburban Office, and Single-Family REITs. Specific company ratings and operating details can be found inside. .

No changes to our earnings and fair value estimates this week Our favorite small-cap REITs are ADC, AHH, CIO and TIER. We also like MAA and NNN among the mid-cap names, and AIV, EQR, and O among the large-cap REITs. We launched coverage this week of Spirit Realty (SRC) and Monogram Residential (MORE). See our company-specific reports for complete details.

STIFEL: OFC ($29.15, Hold) - Baltimore Washington Corridor Market, Fort Meade, Cybersecurity. Hold.

FULL MODEL FULL REPORT   Baltimore Washington Corridor Market, Fort Meade, Cybersecurity. Hold.

After a number of conversations with local market participants, we are updating our bull/bear case points for Corporate Office Properties Trust, and updating our thoughts on Fort Meade and the Baltimore-Washington Corridor (BW Corridor) office market. Please reference our recent industry note entitled Conference Call 9/7/16 - Value Creation or Destruction and Lease Economics Analysis. SLIDES ATTACHED. Dial-in Info Below. for detail on leasing economics and value creation potential.

The Corporate Office Properties Trust bull case is: 1) core portfolio fundamentals continue the bounce off the 3Q15 bottom, 2) cybersecurity spending (government, military, corporate) is expected to aggressively increase, 3) defense contractor demand is expected to pick up, 4) the defense IT niche is unique and 5) dispositions are providing a source of capital for development.   OFC bear case: 1) leasing economics are weak, but middle of the pack for Office REITs, 2) while Fort Meade and the BW corridor is the epicenter for military cybersecurity, other government and corporate cybersecurity has more of a Northern Virginia presence, 3) smaller defense contractors appear to be in an expansion mode, while the larger defense contractors do not appear to be taking more space, 4) defense contractors and the federal government are both notoriously frugal when it comes to leasing space, 5) leasing of informed federal government build-to-suits at National Business Park and Westfield Park totaling 352k SF, may not generate lease revenue until mid 2018. A recent environmental impact report indicates that 2.9mm SF of new development on Fort Meade will be offset by 1.9mm SF of demolition. The timing is 5-10 years. This is in addition to 1) the recently completed 600k SF data center, 2) the 242k SF Joint Cyber Command HQ under construction, 3) the 148k SF Marine Corps Cyber Command about to commence, 4) an estimated $50mm spent annually on infrastructure. Fort Meade is the headquarters for the National Security Administration (NSA), Defense Information Systems Agency (DISA) and roughly 100 other federal government agencies. The federal government appears to have a preference for owning on Fort Meade or leasing 100% of a building at three primary off-base, but fenced and fully secure locations -- National Business Park, Annapolis Junction, Emerson Corporate Center. Interestingly, while the projects on base appear to be very costly, the off-base lease economics appear to be RFP driven and very thin. The 3.9mm SF National Business Park appears to have total availability of roughly 7%, plus the 7% availability in two OFC developments; 310 Sentinel and 540 NB Parkway.   Leasing statistics through 2Q16 for the BWI/Anne Arundel submarket (essentially east of Rte. 1). While absorption averaged 360k SF during 2006-2013, total absorption 2014-1H16 was 132k SF.   We think OFC is appropriately valued at 1) 7.0%/5.9%/5.0% implied NOI/cash flow/CF less G&A cap rates, 2) below our NAV cap rate range of 7.5%-8.0%, 3) 2017E FFO/FAD multiples of 13.9x/17.8x.   We are not adjusting our estimates at this time.

JANNEY - Monogram Residential Trust Inc MORE - BUY Price - $10.59 | Fair Value Estimate - $11.50

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We are initiating coverage of MORE with a Buy rating. Our $11.50 estimate of fair value implies ~9% upside for the stock, which we believe when combined with a 2.8% dividend yield, provides an attractive potential return in the current market environment.

• Apartment REIT focused on Class A properties. Based in Plano, Texas, MORE owned a portfolio of 54 apartment properties (including 2 under construction) across 10 Coastal and Sunbelt states totaling 15,211 units as of June 30. Also, MORE’s portfolio was 94.6% leased with a weighted average monthly rent of $1,909.

• Reasons to own MORE: One of the newest portfolios, discounted valuation, and growth potential. We see upside to MORE’s stock price given (1) the benefits of one of the newest portfolios in the apartment space, (2) a discounted NAV valuation, and (3) ability to produce outsized growth both internally and externally over the next few years.

• NAV valuations are attractive. MORE is trading at a 5.8% nominal implied capitalization rate (5.5% economic) or $204,000 per unit. This compares to the apartment REIT peer group at 5.3% (4.9%) and $334,000 per unit, respectively. Our $11.50 fair value estimate is based on our DCF valuation model.

• Complexity issues, higher leverage, cost of capital, and less liquidity our biggest concerns. The MORE story is not without risks, most notably: (1) the majority of its assets are owned within JVs, which causes complexity issues and may have difficulty attracting the generalist investor; (2) despite recent improvements, MORE’s leverage levels are significantly higher than its peers; and (3) MORE has a higher cost of (and less access to) capital and less liquidity than its peers.

• We remain Neutral on the US REITs, despite the group having already exceeded our 10% total return expectation for 2016. Heading into 2H16, we believe strong generalist investor interest, solid internal growth, and continued access to inexpensive and plentiful capital are somewhat offset by strong valuations, greater levels of new supply, and the threat of higher interest rates.

NOMURA - Japan housing & real estate sector - Office demand down for third straight month

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Daisuke Fukushima
Vacancy rate continues to improve on multiple demolitions, rent upside strengthens

According to major real estate brokerage Miki Shoji, the office vacancy rate in Tokyo’s five central wards improved 4bp m-m to 3.90% in August 2016. Growth in advertised rents remained weak, up only 4.75% y-y, but this nevertheless represents a gradual improvement on 3.98% in January 2016, the weakest recent month. Office demand, a key indicator, fell 5,794 tsubo (3.3m²) m-m, thereby registering its third consecutive monthly decline. However, the vacancy rate improved because eight office buildings were demolished and therefore removed from the survey/statistics, which are now based on 2,591 office buildings, with the result that leasable office floor space fell 9,430 tsubo m-m to 7.28mn tsubo while vacant space fell 3,636 tsubo to 283,896 tsubo. While three straight months of falling demand for office space will warrant ongoing attention as it constitutes the first such move since end-2009/early 2010, the summer is not a particularly strong season for office demand to start with, and we therefore think it would be premature to say that demand has moved into a sustained downtrend along the lines of 2008, when the global financial crisis occurred. We think it would be prudent to maintain a wait-and-see attitude for now. We continue to recommend Mitsui Fudosan [8801] and Tokyo Tatemono [8804] for rising rents and low P/NAV ratios.

FBR - We Think 3Q16 Macro Trends Work to IBKC's Benefit: Raising PT to $73 and Reiterating OP

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As 3Q16 unfolds, we are raising our price target for IBKC to $73 from $70 and reiterating our Outperform rating. We believe broader macro trends are shaping up to provide a proverbial tailwind to IBKC’s earnings in the second half of 2016. More specifically, we think crude oil prices above $40/bbl are a positive for the energy provision outlook, we view strong nationwide mortgage loan origination volumes as a positive for mortgage banking income in 3Q16, and we do not think IBKC’s commercial real estate (CRE) exposure is likely to become a disproportionate overhang to its share price valuations relative to peers. Further, given that it is highly asset sensitive, we think IBKC’s share price is likely to benefit from any increased market anticipation of a rate rise by the Fed in 2H16.

Mortgage Market Continues to Shine; Raising our Origination Forecasts for 2016 to $1.9T; Setting 2017 at $1.75T

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With continued strength in the purchase mortgage market and a healthy boost to refis in light of the low interest rate environment throughout the year, we are raising our estimate for 2016 total mortgage industry originations to $1.9 trillion from $1.65 trillion. For some time now, we have articulated our belief that the normalized origination market in the U.S. shakes out at around $1.7 trillion with the purchase market representing somewhere in the range of $900 billion to $1 trillion and the refi market accounting for the delta. With that in mind, we think that the tailwinds from lower interest rates will boost production through that level in FY16, hence our $1.9 trillion estimate. Additionally, we are introducing our 2017 estimate of $1.75 trillion, which assumes continued positive momentum in the purchase market but a decline in refi volumes from 2016.

DNB NEWS & RESEARCH for 9/6

RESEARCH:
STATOIL:       REIT BUY, PT NOK160 impressive cost-cutting efforts
HUSQVARNA:     REIT BUY, PT SEK75see room for double-digit EPS growth
GETINGE:       REIT SELL,PT SEK165 LT we believe that the roll-up story is over

STIFEL: KRC ($72.63, Buy) - Gold Rush in San Francisco; Target Price $80/sh; Maintain Buy

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Gold Rush in San Francisco; Target Price $80/sh; Maintain Buy

• We have chosen to run the numbers by hand and have come up with the following conclusion: selling a 44% interest in two assets for $508mm ($1.155B at 100%), a value over 2.7x the cost to acquire the assets, creates value and increases NAV.
• Kilroy acquired the two assets, 303 Second and 100 First Street, in 2010 for $354/SF. The just announced joint venture values these two assets at $963/SF and a quoted 'low 4%' cash cap rate.
• We think the transaction underscores the willingness of offshore global capital to pay very full prices for assets in barrier-to-entry markets and make major investments in Gateway City office REITs. We expect additional similar investments to occur selectively throughout our coverage.

• After adjusting our estimates for this transaction, we are increasing our target price to $80/sh. The new target price equates to 2017E FFO/FAD/sh multiples of 22.5x/35.4x, a 4.8% implied NOI cap rate and a TEV of $637/SF, versus our estimate of adjusted replacement cost of $538/SF.

• We estimate that Kilroy Realty currently trades at very reasonable real estate valuation metrics: 1) 5.3%/4.5%/3.8% for Implied NOI, Cash Flow, and CF less G&A Cap Rates. TEV/SF of $584/SF is also reasonable relative to our estimates of $620/$538/SF for gross/adjusted replacement cost. Finally, KRC trades at a 16%/6% discount to our 4.5%-5.0% NAV range.

• This accentuates the pivotal question with REIT valuations -- does a discount to NAV and other attractive real estate valuations offset historically high FFO/FAD multiples?

• Please find our 2Q16 Office market fundamentals update here: Houston Free Fall. San Francisco and Boston Solid, Los Angeles Hype Not in Numbers. 2Q16 Office Fundamentals Update. While concerned about the Silicon Valley, the rest of the KRC markets are relatively solid.

• While clearly Net Asset Value accretive, the transaction will result in cash staying on the balance sheet until spent on development, and near term earnings dilution.

• We are adjusting 2016 FFO/FAD/sh estimates to $3.38/$2.19 from $3.40/$2.21 and our 2017 FFO/FAD/sh to $3.55/$2.26 from $3.57/$2.27. We estimate the normalized 2015-2017 FFO/FAD growth to be 5.0%/7.7%.

Target Price Methodology/Risks

• Our target price of $80/sh, equates to 22.5x/35.4x on our updated 2017 FFO/FAD/sh estimates of $3.55/$2.26 and an implied NOI cap rate of 4.8%.
• Risks to achieving our target price include development and lease-up risk, tech bubble fears, interest rate and general economic risk.