STIFEL: ADC ($47.80, Buy) - Takeaways From Management Meetings With Agree Realty Corporation

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Takeaways From Management Meetings With Agree Realty Corporation

• Hosted Management Meetings. We recently hosted meetings with Agree Realty Corporation's management.
• Why ADC? Agree has a high-quality net-lease pure-play retail REIT portfolio that has been transformed over the last few years. The company's size and unique growth platform could result in some of the best AFFO growth of the next few years. The dividend is well-covered and should continue to grow. Additionally, ADC has one of the strongest balance sheets in the sector.

• Main Message. Management's main message is that the company has created value and continues to create value across its three platforms.

• Diversified Business Model. Agree has three growth platforms: acquisitions, development, and Partner Capital Solutions (PCS). Acquisitions yields are in the mid-7.0% range, development yields are in the 9.0% range, and PCS yields are somewhere in between.

• How Is ADC Differentiated From Its Peers? Management believes it differentiates itself from the other net-lease peers in that it focuses strictly on retail, is a real estate focused company as opposed to being more of a finance company, and management believes its development capabilities also stand out.

• Becoming More Relevant. Agree has become increasingly more relevant in the triple-net sector and among REIT investors as it has reached a certain mass and size. The company’s enterprise value is currently $1.5 billion.

• Should Have Some of the Best AFFO Growth Among the Group. Our 2016, 2017, and 2018 AFFO estimates are $2.53, $2.84, and $3.05, respectively. On an AFFO basis, the company also has some of the highest expected CAGR from 2014-2017E of 8.5%, above the sector average of 6.2%. The cumulative growth is third behind Gramercy Property Trust (26.6%) and STORE Capital Corporation (10.1%).

• Economies of Scale. The company today has 25 employees, up from only 12 just 36 months ago. The company has quadrupled over the last few years. Management believes it can double the size of the company by acquiring $250-$275 million/year of acquisitions with $50-$100 million of development with very little incremental SG&A. This could provide further earnings upside for the company. Management felt the optimal size for the enterprise is ~$3.0 billion.

• Recent Value Creation Opportunities. Some recent and current value creation opportunities include a Starbucks turn-key lease at the strip center in Lakeland, FL, a ground-lease Chick-fil-A in Frankfort, KY, a ground-lease Texas Roadhouse in Mount Pleasant, MI, and the Family Fare Quick Stop in Marshall, MI. Another opportunity is the 20,745 sf Off Broadway lease in Boynton Beach, FL that expires next year. The lease was an original Borders location and accounts for half of the rent roll.in 2017. The property could be expanded by 15,500 sf and re-leased at higher rates.

• YTD Acquisition Volume. YTD, Agree has purchased $192 million of acquisitions at a 7.8% cap rate. Acquisition volume included a $79.5 million, 11-property portfolio with a weighted average lease term of 11.4 year with assets primarily located in L.A. and S.F. as well as Seattle, Austin, Denver, and Orlando. Acquisition guidance is $250-$275 million, which was increased 40.0%. Additionally, the company's PCS division has completed or commenced nine projects.

• Portfolio Statistics. The company’s portfolio is 99.6% leased, with a weighted average lease term of 11.0 years, one of the longest in the industry. Only 12.4% of revenue is rolling in the next five years. The company has the highest investment-grade concentration (46.1%) among its peers. Although non-investment grade, Hobby Lobby and Tractor Supply have solid balance sheets.

• Has Pared Down Walgreens Exposure. Exposure to the company's top tenant Walgreens is currently 13.7%, down from 21.9% as of January 2015. Last quarter, ADC sold a Walgreens in Port St. John, Florida for $7.3 million, or a 5.5% cap rate. It hopes to sell $20-$50 million of Walgreens this year at very attractive cap rates. Overall pharmacy concentration has been reduced by over 1,100 bps over the same time-frame. Management would like to continue to reduce Walgreens concentration to below 10.0% by year-end 2017 and below 5.0% over the next 3-4 years.

• Recently Added New Director. Last week, ADC appointed Merrie S. Frankel to its board of directors. She will replace outgoing board member Eugene Silverman, who has served for over 20 years on the board. Ms. Frankel most recently worked for Moody's Investors Service for the last 18 years in the Commercial Real Estate Finance Group as VP and senior credit officer.

• Dividend. In early May, Agree raised its quarterly dividend 3.20% to $0.48 or annual yield of 4.02%. The current 2016E 76.0% FAD payout is below the group average by 200 bps and at the lower-end of management's payout range. This means the company has ample cushion to raise the dividend going forward.

• Obtained $100 Million Of Unsecured Financings Earlier This Quarter. In early July, ADC obtained $100 million of unsecured financings with a weighted average lease term of 10 years at a blended interest rate of 3.87%. The financings consist of a seven-year $40 million unsecured term loan at 3.0% and a 12-year $60 million privately placed senior unsecured note at 4.42%. The company is likely eligible for an investment grade rating but does not feel it needs one at its current size.

• Strong Balance Sheet. The company’s balance sheet remains strong, in our view, with net-debt+preferred/EV at a healthy 25.4%, one of the lowest in the sector, and net-debt+preferred to EBITDA at 5.1x, also among the lowest in the sector. No debt matures until 2018.

• Valuation. Our 2Q16 NAV per share estimate of $42.00 reflects a 6.0% cap rate. Our value range of $47.50-$37.50 reflects cap rates of 5.5%-6.5%. Shares currently trade at an implied 5.5% cap rate and at a 13.8% premium to our NAV. Our estimated 2017 AFFO multiple is 16.9x, almost 3.5x below National Retail Properties (NNN, $49.42, Buy) and Realty Income (O, $65.54, Buy).

Target Price Methodology/Risks

Our target price of $54.00 reflects a 17.7x our 2018 AFFO estimate of $3.05. Risks to our target price include a prolonged economic downturn or recession, interest rate movements, and general market risk, including continued weakness in the mortgage-backed securities market and commercial real estate fundamentals.

CITI - REITs: drafting winners for 2H16...4 categories to put money to work

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Careful player/stock selection is critical at this stage, especially following an unexpected ~4% selloff in stocks the day before the draft. Our strategy is to own a mix of “top line marquee players” that can provide reliable defense and growth from their best in class management teams, assets, markets and financial strength (AKR, BXP, SPG), a few “creative coaches” that have developed unique plays for their team that haven't yet been fully materialized on the field (FCEA, GGP, SLG, HST), a handful of "breakout players" that could see some near term catalysts to drive their performance above fans’ expectations (HLT, RPAI, SUI, VNO) and a couple of players off the “injured reserve” list that can be drafted at a good price given recent weak performance (AVB, LSI).

Weekly REIT and Lodging Strategy: Citi’s Fantasy REIT Draft – A Guide to the Draft

Top-Line Marquee Players

While everyone wants to own as many top line players as possible, they traditionally come at a hefty price, especially with REITs up ~10% YTD. Our top line "picks" AKR, BXP and SPG share some similar characteristics: 1) high quality asset portfolios in good markets, 2) deep and experienced management teams, 3) same store growth that is generally toward the high end of the peer range, 4) solid balance sheet capacity, and 5) continued value creation and growth through development and redevelopment programs.

Creative Coaches

Creative coaches are not afraid to think outside of the box and come up with unique plays to beat the competition. These coaches are often underappreciated or viewed as “higher risk”, given their strategies haven't been fully materialized on the field yet. However, these coaches offer the potential for higher reward in our view, given good anticipation in taking the right risks. Our “Creative Coach” draft picks include FCEA, GGP, SLG and HST.

Breakout Players

Some players are drafted to serve as a near term catalyst to help drive their team's performance above fan's expectations. The team likely has solid bones but needs an edge to drive performance higher in the near term. We looked for breakout players with one or more near term catalysts that could drive performance above expectations and drafted HLT, RPAI, SUI and VNO.

Injured Reserve

Some injuries are temporary while others are season-ending. When a player is coming off of an injury, a team can pick them up for below their actual value. Herein we highlight stocks that have underperformed for company and sector specific reasons that we believe have the potential to outperform over the next 12-months. Our Injured Reserve picks include AVB and LSI.

STIFEL: FPI ($11.10, Buy) - FPI Merging with AFCO

FULL REPORT FPI Merging with AFCO

FPI Merging with AFCO. This morning, Farmland Partners Inc. (FPI, $11.10, Buy) announced that it was merging with American Farmland Company (AFCO, $6.04, Not Covered). FPI will become the largest and most diversified public Farmland REIT. The transaction will close later this year or early 2017. In mid-April AFCO announced that it was exploring strategic alternatives.

Combined Portfolio. The transaction will give FPI a bigger and more diversified portfolio. The merged entity will own more than 133,000 acres (293 farms) in 16 states throughout the Midwest, the Plains, the Delta, and on the coasts. 74% of the portfolio will be row crops and 26% specialty crops.   Larger Enterprise. The company will have an enterprise value over $850 million, will somewhat de-lever FPI, and provide synergies. Pro forma 2016 revenue increases from $26 million to $42 million.   Accretive to 2017 AFFO. The merger will be 10.0% accretive to 2017 AFFO and could be as high as 20.0% accretive post synergies.   Management Team. FPI's CEO and chairman, Paul A. Pittman, will remain in his role as well as CFO Luca Fabbri. Robert L. Cowan will come aboard as president when the merger closes. AFCO's CEO Thomas S. T. Gimbel and chairman D. Dixon Boardman will join FPI's board.

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.

STIFEL: Rtl REIT - Retail REIT Comp Sheets 9/6/16

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Retail REIT Comp Sheets 9/6/16

REITs were up 1.53% last week. REITs were down 3.7% in August, but are up 14.7% YTD. Retail REITs are slightly underperforming the REIT index YTD, up 14.6%, as regional malls are up 12.9% and shopping centers are up 17.2%.
The REIT sector is trading at a 3.5% premium to NAV. Regional malls are attractively priced to the REIT sector, in our view, trading at a 9.6% discount to NAV while shopping centers are trading at a 6.3% premium to NAV.

• Real estate received its own Global Industry Classification Standard (GICS) by S&P and MSCI as of the close on August 31. Real estate was previously part of the financials and is now the 11th GICS sector. The changes will be implemented September 6. All equity REITs will go into the new sector while commercial finance REITs will remain with financials. There are 27 REITs in the S&P 500.

• WP Glimcher is now Washington Prime Group (WPG, $13.85, NC) following approval of its shareholders at its annual meeting last week. WPG also appointed Sheryl von Blucher to its Board of Directors, filling the vacancy created by the retirement of Marvin L. White. Ms. Von Blucher currently serves as partner and managing director for JMJS Group, a private equity partnership. Prior to JMJS, Ms. Von Blucher led international analysis, strategy and corporate affairs for Heritage Amoco of British Petroleum (BP Amoco).

• Macerich (MAC, $81.92, Hold) officially opened its expanded and redeveloped Broadway Plaza in Walnut Creek, CA. The phase I expansion added 235k sf of small-shop space, more than doubling the amount of small-shop square footage. The expansion is over 90% leased to well-known retailers, such as Arhaus, H&M, J. Crew, lululemon athletica, Madewell, Michael Kors, and Zara. MAC is adding over 50 new retailers to the center through expansion. The new space was created by the construction of a more efficient parking structure and the consolidation of the stand-alone Macy’s Men’s Store into a single larger Macy’s box. Phase I encompassed the demolition of 80k sf of existing retail space and construction of 240k sf of new retail space while phase II involves the demolition of the existing Macy’s Men’s building and 75k sf of new retail sf for a total of 235k sf.

• CBL & Associates (CBL, $40.62, Hold) and its JV partner, High Real Estate Group sold High Pointe Commons in Harrisburg, PA for $33.8 million. A Target and JC Penney anchored the 355k sf community center. CBL used the net sale proceeds of $8.2 million to reduce borrowings on their credit facilities.

Pricing as of 9/2/16 close.