Japan housing & real estate sector - First fall in inbound hotel demand in 43 months

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Some companies now cautious about hiking room rates

On 7 October the Japan Tourism Agency published data from its accommodation survey (second set of preliminary data for July, first set of preliminary data for August). According to these figures, the number of guests in accommodation facilities was down 0.4% y-y in July (with Japanese guests down 2% and foreign guests up 8.9%) and down 1% in August (Japanese guests down 0.9% and foreign guests down 1.8%). This was the first time in 43 months that the number of foreign guests had fallen y-y, which is a potential negative for hotel operators, which constitute an inbound tourism-related sector. The view among stock market participants has been that accommodation demand would rise despite the end of so-called bulk buying by tourists, which has cast a cloud over spending in Japan by foreigners. With demand from Japanese people weakening too, some hotel operators that had been focusing on hiking room rates through the previous fiscal year have started to rein in rate hikes as they factor in occupancy as well, and hiking room rates will become increasingly difficult if demand from inbound tourists pegs level or even falls. At this juncture it is not clear why the number of foreign guests fell in August, and as we only have the first set of preliminary data, we will be watching to see if the second set of preliminary figures, due for release on 31 October, will have any revisions.

FULL REPORT

Rating: Hold

Market Cap (M): $3,753; Price: $8.78 as of 10/07/2016

Price Target new: $10.00; Price Target prior:$10.00

Sector: Triple Net
 

What's Incremental To Our View

We recently hosted a non-deal road show with GPT’s CEO, Gordon DuGan, President, Benjamin Harris, and Head of Investor Relations, Brittany Sanders. As a reminder, we originally covered CSG before the merger with GPT. Frankly, our opinions of GPT’s mgmt team had not yet been solidified through years of coverage, so we found our extended time with mgmt very useful and timely. Overall, our initial positive inclination regarding the mgmt team is confirmed. We consider Gordon (and the GPT team) as a smart steward of shareholder capital, straight forward, and has a mindset focused on the long-term.

Key Takeaways:

• Smart steward of shareholder capital: 1) As a reminder, we were very vocal critics of the way CSG was sold to Gramercy, and we surmised that GPT was buying CSG at a discounted valuation (note: We expected a deal, just not this one), but Gordon clearly delivered for GPT shareholders. 2) In addition, GPT has executed on the capital recycling plan ahead of schedule and on budget. GPT has disposed of $1.4bn of assets at a 6.8% cap rate thus far compared to the original guidance of $1.145-$1.225bn at a cap rate range of 6.7%-7.2%. The company has already sold nearly two thirds of the entire CSG portfolio. Remember, GPT acquired the entire CSG portfolio at approximately 7.5% cap, and the company has been able to sell, the arguably, higher cap rate suburban office assets at a 6.8% cap rate. 3) Gordon DuGan has a notable track record of building companies (running WPC and building Gramercy from infancy stage).
• Focused on the longer term: The company assumes lease-up risk prior to selling largest office assets to obtain better long term returns and continues to do so with the newly formed TPG JV. In our opinion, many management teams take the ‘rip the band-aid off’ approach to portfolio repositioning, but sometimes that is not always the best choice, due to less optimal asset pricing (though the stock may get a short term benefit). We respect mgmt. for choosing a more balanced approach to asset sales and taking on lease-up risk. According to mgmt, as tenant lease term nears expiration on suburban office assets, market pricing can significantly deteriorate (unlike other asset classes) and pricing can fall as much as 25%-30% due to the risk of the unknown. This is why GPT formed the suburban office JV with TPG, to hold office assets with near term tenant roll, attempt to release assets, and then potentially sell at better prices.
• Straight forward: Obviously subjective, but overall, Gordon never shied away from some of our tougher questions and provided us straight forward answers throughout.

Other notes:

• Sold 2 Amazon buildings in Phoenix. We think this was a smart move; the large box market in Phoenix is not deep and we see risk that as Amazon’s distribution strategy evolves, there may be reduced demand for the first generation locations that were largely driven by tax reasons.
• GPT goal is to become 75%-80% industrial as this is management team’s preferred asset class (ours as well) vs. suburban office, which can have significant leasing challenges and CapEx requirements.
• Lifetime Fitness is performing well, 4-wall coverage is appx. 3x.
• 3Q16 should be a trough quarter for earnings as GPT will become a net acquirer in 2017 (seeking to purchase $1bn of industrial assets (6.5%-7.0% cap rate) and sell another $200-$400m of sub. office assets).
• No noticeable impact on industrial demand or asset pricing from Brexit, thus far.

While we have a Hold rating on GPT, we have a favorable view on management and portfolio strategy; we are simply seeking a more relatively attractive entry point. And generally, we have growing concerns about lofty REIT valuation levels, that in large part have been driven by elements such as: Brexit, investors’ search for yield, and easy monetary stimulus (globally) that has grown the fed’s balance sheet from $890bn in 2008 to ~$4.5trillion in Aug-2016.

Ki Bin Kim, CFA
212-303-4124
kibin.kim@suntrust.comAnthony Hau
212-303-4176
anthony.hau@suntrust.com

Ian Gaule, CPA, CFA
212-590-0948
ian.gaule@suntrust.com
Kevin Cheng, CFA
212-303-4149
kevin.cheng@suntrust.com

STIFEL: Rtl REIT - Retail REIT Comp Sheets 10/10/16

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Retail REIT Comp Sheets 10/10/16

REITs had a tough start in October, down 5.3% last week. REITs are up 6.0% YTD. Retail REITs are underperforming the REIT index YTD, up 4.3%, as regional malls are up 2.3% and shopping centers are up 7.4%.
The REIT sector is trading at a 4.2% discount to NAV. Regional malls are attractively priced to the REIT sector, in our view, trading at an 18.3% discount to NAV while shopping centers are trading at a 3.6% discount to NAV.

• Tanger Factory Outlet Centers (SKT, $36.75, Hold) sold an additional $100 million of its 3.125% 10-year notes. SKT completed the initial $250 million note offering in August 2016. The additional $100 million of proceeds will be used to pay down borrowings on its lines of credit after paying off the $96.9 million mortgage on Savannah in late September. SKT acquired its partner’s 50% interest in Savannah in August for $111.9 million - $15 million in cash and the assumption of the $96.9 million mortgage.

• SKT broke ground on its new outlet center development in Fort Worth, TX, adjacent to the Texas Motor Speedway. The 350k sf center is over 60% pre-leased and SKT is planning for a 2017 holiday opening. SKT acquired the land for $11.2 million.

• Washington Prime Group (WPG, $11.55, NC) named Lou Conforti as CEO. Mr. Conforti has served as interim CEO since June 2016. Prior to joining WPG, Mr. Conforti was the executive director and global head of strategy at Colony Capital, served as the global head of real estate for UBS O’Connor, and head of real estate investments at Stark Investments.

• Fitch affirmed DDR’s (DDR, $16.40, NC) credit rating of BBB- with a stable outlook. Fitch noted the improvement in quality in DDR’s real estate, management’s focus on streamlining the business, continued capital recycling activity, and high quality tenant base.

• Fitch affirmed Federal Realty’s (FRT, $145.20, Hold) credit rating of A- with a stable outlook. Fitch noted the consistent and steady cash flow generated by FRT’s portfolio, prudent capital allocation, and redevelopment and mixed-use development opportunities within the portfolio.

Pricing as of 10/7/16 close.

STIFEL: HR ($34.82, Buy) - Updating Model; Reiterate Buy Rating

MODEL
REPORT

pdating Model; Reiterate Buy Rating

Updating model to increase assumed share count to reflect HR's previously announced share issuance. We maintain Buy rating and positive outlook.

Updating Estimates: Updating estimates to adjust for higher average shares outstanding in 3Q. HR had 115.8M shares outstanding as of July 29. We expect slightly lower 3Q per share FFO of $0.39 FFO for 3Q16, down from $0.41 and 2016E FFO decreases to $1.62 from $1.66. Updated estimate is largely in line with consensus after adjustment. Overall, we believe these are minor changes and continue to have a positive outlook on the stock.

Favorable Outlook for MOB REITs: We believe medical office buildings have the most compelling fundamentals among healthcare REIT asset classes and expect MOB focused REITs to outperform the sector as a whole. MOBs are less exposed to oversupply risks, as in seniors housing, and are insulated from direct government reimbursement risk when compared to skilled nursing and hospitals.

Second Quarter Recap: Healthcare Realty reported $0.42 FFO per share compared to our $0.42 estimate and consensus of $0.42. We calculate $0.39 FAD per share, which was slightly ahead of our $0.38 estimate and consensus. FAD growth was driven by strong same-property occupancy and rate growth. Expected investments are slightly better, offset by some additional share issuance. Overall, we see it as a good quarter with not much variance from our expectations.

Reiterate Buy Rating and $36 Target Price; Maintain Favorable Outlook: We have made marginal adjustments to our model to account for the additional equity issuance. We are reiterating our $36 price target and Buy rating. We believe medical office buildings have the most compelling fundamentals among healthcare REITs.

Target Price Methodology/Risks

Our price target of $36 is equal to 21x 2017E FFO, in line with our target multiple for peer Healthcare Trust of America and supported by NAV of $33.

Major Risks Include:

Rising interest rates and/or weaker equity valuation can erode investment spreads. Below estimated acquisition levels and/or investment yield could impair growth rate. Unexpected property level expense growth or lower than expected occupancy due to non-lease renewals or slow lease-up of development could impact margins.

Suntrust Update - MPW @ STRH - $1.25B Steward Health Acquisition

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$1.25B Steward Health Acquisition

Upsized Equity Offering Bolsters Unique Position

Rating: Buy

Market Cap (M): $3,537; Price: $14.80 as of 09/27/2016

Price Target new: $18.00; Price Target prior:$18.00

Sector: Healthcare REITs
 

What's Incremental To Our View

We view MPW's $1.25B Steward Health Care System investment and upsized equity offering positively - adding a new operator relationship and portfolio diversification benefits. MPW is acquiring nine hospital properties from Steward (a Cerberus Capital Management affiliate) for $1.2B along with a $50M equity investment in Steward. Combined with the additional portfolio/capital market activities (~$800M dispositions, $300M MEDIAN investment, 11.9M share ATM), MPW projects ~10% per share accretion. We believe MPW will continue to leverage its unique market position into additional opportunities.

• The deal structure with Steward Health is anticipated to be split equally between master lease (five properties) and mortgage loan arrangements (four properties) with cross-default provisions and corporate guarantees, reflecting a 10.1% GAAP cap rate and CPI based escalators. The agreement also includes the right of first refusal for MPW to acquire future Steward hospitals.
• MPW will invest $50M in equity in Steward Health that, in addition to providing a 4.9% economic interest, offers certain protective rights regarding Steward credit decisions. Cerberus has also agreed to invest $150M in MPW through a private placement transaction.
• The Steward deal should deliver meaningful diversification benefits, with Steward becoming MPW's largest tenant at 17.8% of assets (replacing Prime previously at 20.8%). Prime, MEDIAN, Ernest, Adeptus and RCCH fill the next five spots, representing 16.1%, 14.9%, 8.7%, 7.1% and 6.5% of total gross assets, respectively.
• MPW raised ~$700M in equity through its 50M share overnight equity offering (priced at $14.50) and expects an additional $150M private placement from Cerberus. While the company initially projected an incremental ~$700M in debt, with the upsized equity offering, we think the debt offering may be more likely in the $500M range, helping MPW maintain its low leverage.
• We view this deal positively, and think it further strengthens MPW as a key financial partner with its hospital tenants. We also believe the deal size and relationship should enhance MPW's recognition and unique position in the hospital sector.
• We have updated our model, with our 2016 Normalized FFO estimate moving lower to $1.19 (from $1.30), reflecting the upsized equity offering and assumed incremental $500M in debt, but no Steward revenue (assume deal closes near year end for modeling purposes). Our 2017-2018 Normalized FFO estimates move higher to $1.38, and $1.47 (from $1.34 and $1.43), reflecting the expected incremental benefits of the Steward investment.

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

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Weekly REITCap: Portfolio Managers Guide to PropertyREITs – September 23, 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 22, the MSCI US REIT Index (RMZ) return was +3.9% versus the S&P 500 return of +1.4%. The NASDAQ was +1.7%, the DJIA was +1.0%, the Russell 2000 was +3.0%, the DJ Utilities were +4.5%, and the S&P Financials were +0.6%.

• The best-performing REIT subsectors last week were Industrial (+5.3%), Triple-Net Lease (+5.1%), and Student & Manufactured Housing (+5.0%), while the worst were Single-Family Rentals (+0.2%), Hotels (+1.7%), and Regional Mall (+2.6%).

• The best-performing REIT stocks last week were GEO (+14.4%), DOC (+8.3%), and UHT (+8.1%), while the worst were CBL (-2.7%), PEB (-1.7%), and CUZ (-0.7%)..

• YTD REITs are now outperformingthe S&P 500 by 560bps. The REIT sector is now +13.9% in 2016, while the S&P 500 is +8.2%, both on a total return basis. YTD the Russell 2000 total return is +11.2%, the NASDAQ is +6.6%, the DJIA is +5.6%, the DJ Utilities are +20.5%, and the S&P Financials are +2.2%.

• The best-performing REIT subsectors YTD are Triple-Net Lease (+33.9%), Industrial (+32.3%), and Healthcare (+23.6%), while the worst are Storage (-8.4%), Single-Family Rentals (+2.6%), and Apartments (+3.0%).

• The best-performing REIT stocks YTD are SNH (+68.0%), GOV (+60.5%), and NXRT (+58.8%), while the worst are CXW (-36.3%), NYRT (-17.2%), and FPO (-15.2%).

• Over the past 12 months, the REIT sector total return is +22.5%, while the S&P 500 is +14.6%. Over the last 3 months, the REIT sector total return is +4.4%, while the S&P 500 is +4.9%.

• The US is outperformingmany of the major global real estate markets YTD. The YTD US REITtotal return of +13.9% compares to -0.6% for Europe, +10.7% for Asia, -8.7% for the UK, and +11.8% 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 (4.4%)

• 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.

• Our favorite small-cap REITs are ADC, AHH, CIO, MNR and TIER. We also like MAA and NNN among the mid-cap names, and AIV, EQR, and O among the large-cap REITs.

• We have MNR management on the road next week.

• No changes to our earnings and fair value estimates this week.

Write here...

STIFEL: Rtl REIT - Retail REIT Comp Sheets 9/20/16

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Retail REIT Comp Sheets 9/20/16

REITs were down 0.65% last week, but are up 9.6% YTD. Retail REITs are performing in line with the REIT index YTD, up 9.65%, as regional malls are up 8.4% and shopping centers are up 11.6%.
The REIT sector is trading at a 1.4% discount to NAV. Regional malls are attractively priced to the REIT sector, in our view, trading at a 13.2% discount to NAV while shopping centers are trading at a 1.3% premium to NAV.

• General Growth Properties (GGP, $28.16, Buy) and Simon Property Group (SPG, $208.73, Buy) along with retail licensing firm Authentic Brands completed the bankruptcy court approved acquisition of Aeropostale. The consortium submitted a bid of $243.3 million for 229 stores. The consortium negotiated with other mall owners to keep another 171 stores open in exchange for rent concessions. Aeropostale operates over 600 stores and while there will be some store closures, the amount is much more manageable following the rent concession agreements.
• Sears Holdings (SHLD, $12.12, NC) exercised its right under a master lease with Seritage Growth Properties (SRG, $47.01, NC) to terminate the lease with respect to 17 unprofitable stores totaling 1.7 million sf of GLA. Sears expects to vacate the stores in January 2017 and will pay rent until that time. Sears will also pay Seritage a termination fee equal to one year of the annual base rent plus estimated operating expenses. The annual base rent of the 17 stores is approximately $5.8 million or 2.8% of Seritage’s total annual base rent as of 6/30/16.
• Taubman Centers (TCO, $74.11, NC) announced that Peter J. Sharp will assume the position of President, Taubman Asia, as current President Rene Tremblay transitions to Chairman of Taubman Asia, effective January 1, 2017. Mr. Sharp was previously at Walmart International, serving as President of Walmart Asia Realty, overseeing Walmart’s Asia real estate portfolio and leading Walmart’s expansion into China and entry into India, Japan, and South Korea.
• Golfsmith International filed for Chapter 11 bankruptcy with plans to reorganize or find a buyer for the company. Golfsmith’s restructuring plans include the closing of 20 underperforming stores and refinancing of debt. The company operates 109 Golfsmith stores in the U.S.
• Kite Realty completed its initial public debt offering of $300 million of 10-year notes at 4%. KRG plans to use the proceeds to pay off its $200 million term loan due in July 2019 and other debt repayments, redevelopment, and possible acquisitions.

Pricing as of 9/16/16 close.

NOTE: Additional Disclosures can be found on page 2 as well as pages 11-14.

Aeropostale, Inc. is a client of Stifel or an affiliate or was a client of Stifel or an affiliate within the past 12 months.

Aeropostale, Inc. is provided with investment banking services by Stifel or was provided with investment banking services by Stifel or an affiliate within the past 12 months.

Stifel or an affiliate has received compensation for investment banking services from Aeropostale, Inc. in the past 12 months.

Stifel or an affiliate expects to receive or intends to seek compensation for investment banking services from Aeropostale, Inc. in the next 3 months.

Self-Storage REITs

Full Report

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.

STIFEL: H ($50.19, Hold) - Fine-Tuning Estimates

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Fine-Tuning Estimates

• Adjusting Estimates. We are adjusting our 2016 EPS estimate to $1.50 (from $1.52), 2017 EPS estimate to $1.58 (from $1.60) and our 2018 EPS estimate to $1.61(from $1.63) to account for lower RevPAR in 3Q.

• Balance Sheet. We estimate, Hyatt’s unrestricted cash and cash equivalents balance is over $400 million and its consolidated debt was $1.5 billion. The company has $1.5 billion of line capacity. Net debt-to-EV of 22.0% is in-line with the industry average of 21.9%, and net debt-to-2017E EBITDA is 2.4x, slightly above the industry average of 2.2x.

• Valuation. Shares currently trade at a 10.4% discount to our $56.00 estimated NAV, which reflects a 12.0x multiple on franchise and management fees, an 11.0x multiple on owned real estate, and a 7.0x multiple on unconsolidated ventures on 2017 EBITDA estimates. Shares also trade at an 10.8x multiple on our normalized 2017E EBITDA of $789 million. Our estimate excludes the $32 million of stock-based compensation.