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.

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.

STIFEL: Lodging C-Corps - Establishing Target Prices On Hold-Rated Stocks

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Establishing Target Prices On Hold-Rated Stocks

Due to a change in firm policy, we are establishing 12-month target prices for Hold-rated stocks under coverage. See below for updated target prices and multiples across our coverage universe.

Extended Stay America (STAY; Hold; $14.40). Our target price of $15 reflects a 9.0x multiple on 2018E EBITDA of $611 million. Risks To Our Target Price: Lodging is correlated to the overall health of the economy. A prolonged economic downturn could have adverse effects on sector performance.   Hyatt Hotels Corporation (H; Hold; $50.19). Our target price of $48 reflects a 10.5x multiple on 2018E EBITDA of $817 million. Risks To Our Target Price: Lodging is correlated to the overall health of the economy. A prolonged economic downturn could have adverse effects on sector performance.   La Quinta Holdings (LQ; Hold; $10.73). Our target price of $10.25 reflects an 8.1x multiple on 2018E EBITDA of $350 million. Risks To Our Target Price: Lodging is correlated to the overall health of the economy. A prolonged economic downturn could have adverse effects on sector performance.   Marriott International (MAR; Hold; $68.69). Our target price of $65 reflects a 10.4x multiple on 2018E EBITDA of $1.963 billion. Risks To Our Target Price: Lodging is correlated to the overall health of the economy. A prolonged economic downturn could have adverse effects on sector performance.   Starwood Hotels & Resorts Worldwide (HOT; Hold; $75.45). Our target price of $73 reflects the deal price which equates to 0.8x of our target price for MAR and $21/share in cash. Risks To Our Target Price: Lodging is correlated to the overall health of the economy. A prolonged economic downturn could have adverse effects on sector performance.

STIFEL: Triple-Net - Triple-Net REIT Comp Sheets

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Triple-Net REIT Comp Sheets 9/18/2016

• REITs Pull Back, Sector Outperforms. The overall REIT sector pulled back 70 bps this past week and is +9.6% YTD. The triple-net sector outperformed gaining 10 bps for the week and is +28.7% YTD.

• Dividend Yield. Triple-net REITs are trading at 16.3x 2017E FFO as compared to equity REITs trading at 17.2x. The current dividend yield for the sector is 4.78% vs. the REIT sector dividend yield of 3.82%. The 96 bps spread is 67 bps below the long-term average spread of 163 bps.

• ADC Management Takeaways. We recently hosted meetings with Agree Realty Corporation's (ADC, $46.41 Buy) management. Management's main message is that the company has created value and continues to create value across its three platforms: acquisitions, development, and Partner Capital Solutions (PCS). 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. Acquisitions yields are in the mid-7.0% range, development yields are in the 9.0% range, and PCS yields are somewhere in between. 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.

• GPT Establishes Strategic Office Partners With TPG. Gramercy Property Trust (GPT, $9.26, Buy) announced that the company has formed Strategic Office Partners with TPG Real Estate. The platform will invest in up to $1.0 billion of single-tenant office assets in high-growth MSAs. The entity will have $400 million of equity and has obtained $200 million of non-course financing. GPT will own a 25.0% interest in the venture. At close, GPT has sold six office assets ($187.5 million) at a 9.5% cap rate with a weighted average lease term of 3.6 years. The assets are located in the Los Angeles MSA, San Francisco Bay Area, the San Diego MSA, Nashville, and Minneapolis.

• Also Receives Investment Grade Rating From Fitch. Fitch provided GPT with an initial BBB rating with a stable outlook. The company also has a BBB- with a stable outlook from S&P and Baa3 with a stable outlook from Moody’s. GPT now has investment grade ratings from all three major rating agencies.

• FCPT Purchases More Restaurants. Four Corners Property Trust (FCPT, $20.01, Not Covered) acquired four KFC restaurants in the Detroit, Michigan MSA for $3.9 million with a weighted average lease terms of 20 years.

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.

STIFEL: Office/Industrial REITs - Bullish Base Case and Bullish Case for REITs. Office & Industrial REIT Metrics Update 9/12/16

FULL REPORT Bullish Base Case and Bullish Case for REITs. Office & Industrial REIT Metrics Update 9/12/16

While REITs share prices are proving to be volatile, we are focusing on a base case for the overall capital markets and then attempting to determine where REITs should fit. If one assumes consensus well into 2017 of 1) slower US and global growth, 2) despite a modest fed funds rate hike or two, no pressure on the long end of the curve, 3) TINA (There Is No Alternative) and FOMO (Fear Of Missing Out) driving the U.S. equity markets up via multiple expansion, 4) assuming $125/sh for 2017 S&P earnings and a 20x multiple equates to the S&P reaching 2,500, and 5) continued risk-off and thirst for yield trades; it is relatively easy to project REITs outperforming a healthy U.S. equity market. Pricing as of close 9/9/16.

We are also assuming that REIT managements are aware that, while Net Asset Value and other real estate valuation metrics are and will always be important, real estate is late in the cycle, the easy re-leasing spreads are gone, development is everywhere and the incremental investor is focused more on dividend yield and stock valuation metrics than anytime in the past decade. Accordingly, we expect strong dividend increases to be announced in 2H16.   Despite recent positive performance following 2Q16 earnings calls, we continue to favor Gateway City office REITs. However, we think most of these Gateway City office REITs need to increase their dividends substantially as sub 2.5% yields are a deterrent unless fundamentals are very strong and value creation (not just an NAV discount off an historically low private market cap rate assumption) is obvious.   These include Vornado (VNO, Buy, $99.45), SL Green (SLG, Buy, $111.00), Empire State Realty Trust (ESRT, Buy, $21.28), Boston Properties (BXP, Buy, $135.22) and Kilroy Realty (KRC, Buy, $69.18) due to a combination of fundamentals, real value-add platforms and attractive valuations relative to suburban or low barrier office REITs. We view suburban office REITs as often (but not always) encumbered by weak fundamentals with a pension fund advisor type, generic platforms.   In the low barrier office world, our only Buy-rated office REIT is Mack-Cali (CLI, Buy $27.73) due to its 1) substantial valuation discount relative to the other low barrier office REITs, 2) active asset recycling, 3) apartment development potential with low land basis and 4) leasing upside.   Despite excellent YTD 2016 performance, we continue to like Industrial REITs and have Buy ratings on six of the eight we cover. We expect industrial fundamentals to continue to modestly surprise to the upside and look attractive relative to other property sectors. We also note that the inevitable increase in supply about the time demand subsides continues to get kicked down the proverbial block.   So, will REITs overall be driven by: 1) the equity markets and a risk-on or risk-off mentality, 2) interest rates at either end of the yield curve, or 3) fundamentals?   While we think individual stocks and property sectors will be driven by fundamentals, value creation potential and dividends; we expect #1 and #2 and the corresponding funds flows to drive the REIT space overall. Which one? Likely, whichever is most volatile.   Below are links to wires we have recently published:   Our most recent Funds Flow Update Wire from 8/30/16: Funds Flows Update. Japanese Flows Strong. Generalist Investors the Key. SLIDES ATTACHED.   Our most recent Net Asset Value Creation-Destruction Wire: Conference Call 9/7/16 - Value Creation or Destruction and Lease Economics Analysis. SLIDES ATTACHED. Dial-in Info Below. Below, we have our 2Q16 Earnings wires for each company under coverage (in chronological order from most recent reporter to first reporter):   Lexington Realty Trust (LXP, Hold, $10.27) - Since the February 2016 bottom, LXP has performed nicely as a yield play rose amongst the thorns. 400 Meter Sprint. Maneuvering the Curves Easily. Maintain Hold.   Vornado - VNO continues to be a complicated story but there have been additional steps toward increased transparency 26.2 Mile Marathon or 10K Open Water Swim? Glory for Those Who Finish. Maintain Buy. We also adjusted our Price Target shortly after earnings seasons came to a close: Post Earnings Season Price Target Adjustment Up to $115/sh. Maintain Buy.   DCT Industrial (DCT, Buy, $47.76) - Continued success for our friends out in Denver who continue to be the bell cow of pure play, domestic industrial REITs. Continuing To Make it Look Easy; Adjusting Estimates; Increasing NAV; Buy and Rhythmic Gymnastics and Trampoline. Target Price up to $52/sh. Maintain Buy.   Mack-Cali - As CLI moves into their new Jersey City, NJ offices, they continue to execute on their two-year plan. High Jump. Scissors, Eastern Cut-off, Western Roll, Straddle or Fosbury Flop. Target Price Up to $30; Maintain Buy. Just last week Mack-Cali hosted a Gold Coast Property Tour: Triple Jump. Hop, Skip, Jump Through Apartment and Office Gold Coast Portfolio. Maintain Buy.   Piedmont Office Realty Trust (PDM, Sell, $21.19) - PDM continues to exit non-core markets slowly, but surely, and it seems the Street has taken kindly to this strategy. Race Walking. 50 Kilometer Walk. Maintain Sell.   Rexford Industrial Realty (REXR, Buy, $21.67) - As the only industrial REIT completely focused on the SoCal market, Rexford continues to succeed with their single-market focus. Sailing - Keeping the Rexford Yacht North of the Equator. Maintain Buy. TP Up to $24.50. Rexford also recently announced a preferred equity offering: Rugby Returns to the Olympics. Preferred Shares Returning to the REIT Capital Stack. Buy.   Douglas Emmett (DEI, Sell, $36.72) - Staying with the southern California theme, we think the West L.A. and SoCal office markets are solid, but we still have questions regarding DEI. Beach Volleyball. What Else? Maintain Sell.   Highwoods Properties (HIW, Hold, $51.09) - With one of the top management teams in REITland, HIW has been one of the top-performing office REITs of 2016 (up 18.6% vs. 9.0% for the RMS YTD in 2016). Weightlifting; Heavy Lifting Looking Easy; Maintain Hold   Armada-Hoffler Properties (AHH, Buy, $13.61) - The strategy is expanding, the portfolio is transitioning and the crew from Virginia Beach continue to be the Teflon dons in an environment that has gravitated towards yield plays. Cycling in the Velodrome. Maintain Buy. TP Increased to $15.50/sh.   First Industrial Realty Trust (FR, Buy, $27.79) - With new CEO Peter E. Baccile coming in, Mr. Duncan rides off into the sunset on a high note. Cruising Through the Preliminary Heats. Increasing TP to $32/sh. Buy.   Duke Realty Trust (DRE, Buy, $26.77) - DRE has risen up the ranks to become one of the top-performing industrial REITs YTD at 29.0% vs. 9.0% for the RMS. Decathlon Continues. More Delevering. Target Price up to $30/Sh. Maintain Buy.   Equity Commonwealth (EQC, Hold, $31.04) - Sooner rather than later EQC will have some serious decisions to make regarding the portfolio they want to own in the long term. Javelin Throw? Javelin Catch? Hold.   Corporate Office Properties Trust (OFC, Hold, $27.84) - OFC has recovered some of their early 2016 momentum in the dog days of summer. Multiple Games at the Olympic Games. Maintain Hold.   First Potomac Realty Trust (FPO, Sell, $9.44) - FPO still has many obstacles to hurdle, but the re-shaping of the portfolio and strategy has certainly begun. Gymnastics. Perfect 10? Or Really A 9? Maintain Sell.   Terreno Realty Trust (TRNO, Buy, $26.52) - Although TRNO has been the industrial laggard under coverage, we still believe no new supply and declining inventory is a good thing. Open Water Swim. Finally Swimming with the Cost of Capital Current. Maintain Buy.   Washington Real Estate Trust (WRE, Hold, $31.01) - We recently hosted the WRE management team to some investor meetings, here are our take-aways: Maryland Athletes Win Twenty Olympic Medals While WRE Happy to Exit Maryland Office Market. NDR Recap. Hold. The strategy is being endorsed by investors and WRE is an excellent Washington, D.C. proxy, in our view. Sweltering Summer. Coolly Rowing on the Potomac. Eight Man Boat. Maintain Hold.   Empire State Realty Trust - PSA: Please stop asking about the observatory. Take a look at some of the rental rates. New Olympic Sport - ESB Stair Climb. Lease Economics Rival Stair Slope. TP Increase to $23/sh. Buy.   Parkway Properties (PKY, Hold, $17.68) - Until additional information is provided in the coming weeks on the merger-spin with Cousins Properties (CUZ, Hold, $10.84), there shouldn't be many catalysts. PKY: Synchronized Swimming. Teammates Include Cousins Properties and Oil Market. Hold. CUZ: Synchronized Diving. Synchronized to Parkway and Oil Prices. Maintain Hold. A look at our initial valuation on the merger spin-off from PKY's view: Smart and Expensive? Expensive, but Smart? Isolate Houston Purgatory. Hold. Boston Properties (BXP, Buy, $135.22) - BXP sticks to what they are great at: 1) Strong development pipeline and 2) great submarket recognition. Michael Phelps & the U.S. Swim Team. 2Q16 Earnings Analysis. Maintain Buy.   Franklin Street Properties (FSP, Hold, $12.30) - FSP is very much a dividend-yield name with low cost debt helping maintain FFO. Archery. Gradual Leveraging Up Keeps Valuation Metrics Static. Hold. FSP also recently announced an equity offering in conjunction with their acquisition of Pershing Park Plaza in Atlanta, GA as well as to fund some of the redevelopment at 801 Marquette Avenue in Minneapolis, MN. Long Jumping to Lower Leverage. Smart Equity Raise. Hold.   Kilroy Realty Trust - Even with "tech bubble" headline risk, KRC is doing too good a job to be on the sidelines. 10,000 Meter Run with Usain Bolt Leasing Expectations. Maintain Buy.   Liberty Property Trust (LPT, Hold, $39.87) - A dividend cut at a time when the incremental generalist investor is snooping around for yield plays has slowed the 2016 run-up of LPT. IOC Intervenes. Dividend Cut. More Involvement Needed. Maintain Hold.   SL Green Realty Corp. - Although SLG has underperformed the RMS (0.8% vs. 9.0%, respectively), it looks to have righted the ship and is poised for a strong finish to 2016 . Weightlifting. Positive Re-leasing Spreads vs. Heavy Lifting Related to Market Perceptions. Target Price Up to $121/sh. Buy. We also increased our price target following their recent JV partnership with Prudential for Eleven Madison: Hammer Throw. Full Block of Buildings Disappeared. As Did 40-49% of Eleven Madison. Price Target Up to $125/sh. Buy.   Brandywine Realty Trust (BDN, Hold, $15.78) - Philadelphia-centric portfolio with a significant amount of dispositions in the rear-view mirror. Mile Swim. Solid Core Portfolio. Development Projects Waiting for Anchors. Neutral Leasing Metrics -- New Analysis. Hold.   EastGroup Properties (EGP, Hold, $70.62) - Soft leasing economics rear their not so ugly heads. Steeplechase. Gather Speed; Then the Hurdles. Weak Lease Economics -- New Analysis. Downgrade to Hold.   Prologis (PLD, Buy, $51.49) - Although there are many moving pieces here, and it may be confusing to the general investor, NAV creation has continued. Decathlon. Excelling in Numerous Events. Value Creation Continues. Lease Economics Creating Value (New Analysis). Buy. Links to our most recent office and industrial REIT sector wires follow:   Please see our Replacement Cost Update here: Bonkers!! Replacement Cost - Office & Industrial - Conference Call - Thursday, July 7, 11AM (Slides Attached Below)   Our previous NAV creation/destruction call: Conf. Call 3/1/16 - NAV Creation or Destruction and Office Lease CAPEX vs MTM Analysis SLIDES ATTACHED. Dial-in Below.   Our previous Funds Flows update call: Funds Flows Update. Japanese Flows Strong. Generalist Investors the Key. SLIDES ATTACHED.   Our most recently updated, deep-dive Washington D.C. MSA wire: Conference Call -- 11 AM. 8 April 2016. Washington D.C. Office and the Cap Ex Conundrum. SLIDES ATTACHED 2Q16 Office Fundamentals - Houston Free Fall. San Francisco and Boston Solid, Los Angeles Hype Not in Numbers. 2Q16 Office Fundamentals Update.   2Q16 Industrial Fundamentals - National Vacancy Down 30 bps to 5.8% Q/Q. Elevated Starts Where Economics Work. 2Q16 Industrial Fundamentals Still Strong.   On June 18, 2015, we published our annual office REIT portfolio review - SLIDES ATTACHED - Amenity & Transportation - The Best Positioned Office REIT Portfolios - Conference Call 11 AM ET 6/19/15

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

FULL REPORT

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.

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.

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

FULL REPORT

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.

STIFEL: Office/Industrial REITs - Conference Call 9/7/16 - Value Creation or Destruction and Lease Economics Analysis. SLIDES ATTACHED. Dial-in Info Below.

FULL REPORT

Conference Call 9/7/16 - Value Creation or Destruction and Lease Economics Analysis. SLIDES ATTACHED. Dial-in Info Below.

• We are hosting a conference call on Wednesday, September 7 at 11AM ET. Dial in numbers are as follows: (888) 267-2848 (Domestic); (973) 413-6103 (International); Conference ID: 987648;

• A replay of this conference call will be available through September 21, 2016 - Replay dial in numbers are as follows: (800) 332-6854 (Domestic); (973) 528-0005 (International); Conference ID: 987648

• We believe the best way to determine a company's ability to create (or destroy) value is to 1) review its Net Asset Value at a static cap rate, 2) adjust for dividends paid, 3) evaluate the lease economics and then 4) overlay projected property market conditions, portfolio expectations and development-driven value creation.

• The body of this report reviews each company under our coverage and its Net Asset Value plus dividends paid during (in most cases) 2006-1H2016. In our summary of each company, we also provided a projection given the current strategy, development pipeline and lease economics.

• Additionally, we have compared and contrasted the Lease Economics Analysis for the Office & Industrial REITs under coverage. We recently started this analysis to provide a forward look at expected portfolio performance based on the re-leasing spreads combined with the re-leasing costs. Evaluating one without the other is similar to a PB&J without either the PB or the J.

Pricing as of 9/6/16

• Our primary conclusions: 1) creating value without the benefit of cap rate compression is not easy, 2) asset re-cycling and portfolio re-positioning appear to be working, 3) the dividend is vital over the long term, 4) quality development worked, while commodity development, plus high land inventories, proved disastrous, 5) the 2009 re-equifications were painful, 6) prudent, proactive equity raises were helpful, 7) quality assets and submarkets usually ruled the day, 8) high re-leasing costs and marginal re-leasing spreads result in value erosion

METHODOLOGY -- No Cap Rate Geniuses

• Our methodology was to hold the cap rate fixed for the time period reviewed to determine share value creation or destruction absent cap rate fluctuations (no "cap rate geniuses" allowed), and add the dividend paid in order to determine portfolio value created or destroyed and total shareholder return.

• For some companies with major portfolio re-positioning strategies, we adjusted the underlying cap rate.

• This captures, from a valuation perspective, hard-to-detect nuances such as 1) excess capex and re-tenanting costs, 2) cash costs for balance sheet management, which were real costs in spite of being excluded from FFO, 3) real re-development returns, 4) the importance of the dividend in total return to shareholders, and 5) stock based compensation.

• Note that we usually annualized our NAV estimates as quarterly estimates have often been volatile historically.