Where it all comes together!
Storage REITs underperforming year to date. Storage REITs have posted a total return of –11.15% year to date, underperforming the RMS REIT Index by 2,072 bps. Last week, storage REITs were –1.30%, underperforming the RMS REIT Index by 65 bps.
On the morning of September 12, Farmland Partners Inc. (FPI – Outperform) announced that it had entered into an agreement to acquire American Farmland Company (AFCO – Outperform) in a stock-for-stock transaction, creating the largest publicly traded farmland REIT. The merger is expected to grow FPI's total acreage by 15% and should yield a combined company with a market cap of roughly $360 million based on yesterday's close. We view the acquisition as a positive for shareholders of FPI as the new company should benefit from increased scale, better access to capital, a more attractive cost of capital, and cost-related synergies, which should ultimately drive AFFO growth. We believe that increased earnings power will further support the company's quarterly dividend of $0.1275, which currently offers a ~4.5% yield to buyers at these levels. Reflecting the announcement, as well as some adjustments made to our AFFO assumptions, we are increasing our FPI estimates for FY16 AFFO per share to $0.38 from $0.19 and our FY17 AFFO per share estimate to $0.48 from $0.26. We are also modestly increasing our NAV per share estimate for FPI from $12.03 to $12.09.
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.
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.
With 2Q16 reporting now wrapped up for the REITs and special servicers, we are providing updated investment ratings, price targets, and estimate changes for our coverage. Additionally, we are highlighting our strongest picks and most noteworthy takeaways coming out of earnings season.
Storage REITs underperforming year to date. Storage REITs have posted a total return of –8.74% year to date, underperforming the RMS REIT Index by 2,168 bps. Last week, storage REITs were –0.33%, outperforming the RMS REIT Index by 11 bps. | |