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.

Janney/IRET: IRET selling Senior Housing portfolio for $280M; Positive for the stock

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Investors Real Estate Trust (IRET) - BUY

IRET selling Senior Housing portfolio for $280M; Positive for the stock

Flash Takeaways:

IRET announced it entered into agreements to sell 26 senior housing properties and 1 multifamily property for $236M. While we had been expecting IRET to announce a significant amount of non-core asset sales next week in concert with its F1Q17 earnings, we view the potential exit of the senior housing business for gross proceeds of nearly $280M to be a significant positive for the stock.

Analysts Notes:

• Selling additional senior housing assets to Edgewood. On August 31, IRET announced that it had entered into six separate sales agreements with affiliates of Edgewood Senior Living to sell 26 of IRET's senior housing properties (Edgewood currently operates 25 of the 26 assets) and one multifamily asset for gross proceeds of $236M.

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• Entire senior housing portfolio could be gone for $279.5M. If this transaction closes (expected in calendar 2017), along with Edgewood’s previously exercised purchase option on 8 other senior housing properties in Idaho for $43.5M, IRET will have sold its senior housing portfolio for $279.5M of gross proceeds.

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• The six transactions are subject to various conditions (including each sale being contingent on the closing of the other sales) and breakdown as follows: (1) 5 properties with 386 units in Cheyenne, Casper, and Laramie, WY for $53.0M; (2) 2 properties with 256 units in Hermantown, MN for $36.8M; (3) 4 properties with 220 units in Virginia, MN, Kalispell, MT and Omaha and Hastings, NE, for $32.3M; (4) 5 properties with 514 units in East Grand Forks and Brainerd, MN, Bismarck and Fargo, ND and Rapid City SD for $71.0M; (5) 9 properties with 278 units in ND, SD, NE, and MT for $28.8M; and (6) 1 property with 97 units and one townhome property with 24 units in Sartell, MN for $14.0M.

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• We are maintaining our Buy rating on IRET, as we view this transaction (when it closes) as a positive for IRET's repositioning efforts, as well as a positive for the stock. We are also maintaining our $7 Fair Value estimate and our F2017 FFO per share estimate of $0.47 at this time.

JANNEY: REITS Mirror, Mirror: 2Q16 Revisions to Apartment Same-Store Estimates

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We are updating our 2016 and 2017 same-store NOI, revenue, and expense growth estimates for the 8 major apartment REITs following 2Q16 earnings (see Figure 1). Importantly, our estimates continue to be predicated on a US economy (including job growth) and interest rates similar to today going forward. We are also not expecting any significant benefit in 2017 from the “odd year bounce” of the last few years. On a weighted average basis, we now expect 4.8% SS revenue growth and 5.5% SS NOI growth for the peer group in 2016 (-10bps from last quarter), and 4.0% and 4.4% in 2017 (-10bps from last quarter), respectively.

AIMCO (AIV) – Management SS NOI growth guidance is +5.5% to +6.5%, with a YTD actual of +5.5%. We are expecting +4.6% SS revenue growth and +5.7% SS NOI growth in 2016, and +4.0% and +4.4% in 2017. Our 2016 estimates are consistent with our previous estimates (following 1Q16 earnings), while our 2017 NOI estimate improved 30bps.

AvalonBay (AVB) – Management SS NOI growth guidance is +5.0% to 5.75%, with a YTD actual of +6.4%. We are expecting +4.7% SS revenue growth and +5.6% SS NOI growth in 2016, and +3.9% and +4.3% in 2017 based on additional softening in NYC and SF. Our 2016 estimates have been revised downward (consistent with AVB’s own guidance), while our 2017 estimates are marginally lower (-10bps).

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Camden (CPT) – Management SS NOI growth guidance is +4.0% to +4.5%, with a YTD actual of +5.1%. We are expecting +4.2% SS revenue growth and +4.4% SS NOI growth in 2016, and +3.8% and +4.0% in 2017. Our 2016 estimates have been revised slightly upward on lower expenses, while our 2017 estimates remain unchanged.

Equity Residential (EQR) – Management SS NOI growth guidance is +3.75% to 4.25%, with a YTD actual of +5.9%. We are expecting +3.7% SS revenue growth and +4.2% SS NOI growth in 2016, and +3.6% and +3.8% in 2017 based on additional softening in NYC and SF. Our 2016 estimates have been revised downward (consistent with EQR’s own guidance), while our 2017 NOI estimate is now 40bps lower.

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Essex (ESS) – Management SS NOI growth guidance is +7.7% to +8.5%, with a YTD actual of +8.5%. We are expecting +6.9% SS revenue growth and +8.4% SS NOI growth in 2016, and +5.4% and +6.4% in 2017 based on additional softening in NoCal. Our 2016 estimates have been revised downward by 20bps (ESS also lowered its guidance), while our 2017 estimates are roughly flat as we had been expecting some reversion to the mean on the West Coast next year.

Mid-America (MAA) – Management SS NOI growth guidance is +4.75% to +5.25%, with a YTD actual of +6.4% (note: MAA is 1 of 2 to raise their SS NOI guidance this year). We are expecting +4.3% SS revenue growth and +5.0% SS NOI growth in 2016, and +3.7% and +4.0% in 2017 as MAA has more difficult occupancy comparisons going forward. Our 2016 NOI growth has been revised upward by 70bps on both higher revenue and lower expense growth, while our 2017 NOI estimate is now 30bps higher given our expectations of continued strength. Our numbers for 2017 do not include PPS.

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Post (PPS) – Management SS NOI growth guidance is +2.5% to +3.3%, with a YTD actual of +2.9% (note: PPS is the other that raised their SS NOI guidance this year). We are expecting +3.1% SS revenue growth and +2.7% SS NOI growth in 2016, and +3.1% and +2.7% in 2017 for the legacy PPS portfolio (PPS' announced acquisition by MAA should close by YE2016). Our 2016 NOI growth has been revised upward by 40bps on slightly higher revenue and 30bps lower expense growth.

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UDR (UDR) – Management SS NOI growth guidance is +6.5% to +7.0%, with a YTD actual of +6.8%. We are expecting +5.6% SS revenue growth and +6.6% SS NOI growth in 2016, and +4.2% and +4.7% in 2017, making UDR second to only ESS in terms of expected 2017 performance. Our 2016 NOI growth remains in-line with our previous expectations, while our 2017 NOI estimate is now 60bps higher given our expectations of continued strength in UDR’s non-core markets.

Buy-rated AIV, MAA, and EQR remain our favorite names in the apartment REIT space.

Janney/IRET: Initiating coverage of IRET with a Buy rating

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Investors Real Estate Trust

IRET - BUY

Price - $6.46 | Fair Value Estimate - $7.00

Initiating coverage of IRET with a Buy rating

We are initiating coverage of IRET with a Buy rating. Our $7 estimate of fair value implies ~10% upside for the stock, which when combined with an 8.1% dividend yield, provides an attractive potential return in the current market environment.

• Transitioning into a pure-play apartment REIT. Based in Minot, ND, IRET owned a portfolio of 102 apartment assets totaling 12,974 units across 7 states in the upper Midwest (as well as healthcare, office and industrial assets slated to be sold) as of April 30, with over one-third of its NOI coming from North Dakota. As of F4Q16, IRET’s apartment portfolio was 90.8% occupied with an average monthly rent of $960 (both among the lowest in the apartment REIT subsector).

• De-leveraging via asset sales, inexpensive valuation, and strong returns from redevelopment the reasons to own IRET. We see upside to IRET’s stock price given (1) management has targeted ~$600M of non-core assets for dispositions and will use a portion of the proceeds to reduce debt, (2) a reasonable valuation from both an NAV and multiple perspective (plus an 8.1% current dividend yield), and (3) strong returns (11.3% thus far) on its kitchen and bathroom redevelopment program being rolled out across its portfolio.

• 8.1% dividend yield as well as NAV and multiple valuations are attractive. IRET is trading at a 7.4% implied capitalization rate (7.2% or $81,000 per unit for their apartment assets), and C2017 FFO and AFFO multiples of 13.3x and 15.1x, respectively. Our $7 fair value estimate is based on our DCF valuation model.

• Exposure to “unloved markets”, lengthy transition to an apartment REIT, and the North Dakota market overhang are our biggest concerns. However, the IRET story is not without risks, most notably: (1) IRET’s core upper Midwest markets are largely “unloved” by investors; (2) the transition to a pure-play apartment REIT could take several years and become messy (including a potential “right-sizing” of the dividend); and (3) we believe IRET’s ND markets (~35% of NOI) are likely to remain operationally challenging and an overhang on the stock.

• 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

JANNEY UPDATE: Talking Heads: 2H16 Apartment Market Commentary

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Given the sometimes meaningful differences between the various multifamily REIT management team’s experience in and outlook for the major apartment markets, we are updating our “Talking Heads” apartment market commentary report for 2H16. This report aggregates the specific market commentary from the various management team’s 2Q16 earnings calls to give investors a more comprehensive outlook for 18 key markets, as well as the relative bullishness/bearishness of the various REIT management teams.

• The slowdown in San Francisco rent growth proved to be persistent as EQR, struggling with occupancy and rent growth, reduced growth expectations for the second time. Interestingly, the outlook between higher-end operators such as EQR and owners of more moderately priced properties continues to diverge. The latter, such as AIV and ESS, observed solid rent growth and occupancy, and in the case of ESS, reduced lease-up concessions.
• New York’s problems remain focused on Manhattan, which according to the REITs has not generated enough high-paying jobs to absorb the market’s high-end supply being delivered. Instead, with job growth coming primarily from mid-level jobs, the borough is left with a significant supply of high price-point units and weakening rent growth relative to the outer boroughs and suburbs. AVB, EQR, and UDR all seem to have differing views of 2017 supply on a submarket basis. We expect Manhattan rent growth to remain weak over the next 18 months.
• Seattle remains surprisingly strong as forecasters had predicted 1H16 job growth would slow from the mid-4% range, which has yet to occur. With YTD 2016 job growth of 43,400 (vs 30,000 in 2015) exceeding expectations, Seattle has been able to easily absorb the new supply coming on-line (~3.5% of inventory). Despite expected deliveries of 7,000+ units in 2016 and another 7,000 units in 2017 (on the back of ~6,000 units in 2015), Seattle’s rental rate growth remains surprisingly strong (ranging from 5% to 9% in 2Q16).
• The Houston market faces 24,000 units coming online this year, plus another 10,000-12,000 units in 2017. We expect the market to remain weak in 2017 given the continued losses in energy employment. However, gains in other sectors and potentially moderating supply could set Houston up for a recovery in 2018.
• While LA does not appear to be a problem area, Downtown and Marina Del Rey continue to see pockets of weakness from new housing supply. Given various submarket exposures, we expect weaker results from AVB and UDR, while others, such as ESS and EQR, appear to be less affected in 2016. Despite LA’s increasing exposure to the technology industry in places such as Silicon Beach, no REIT has indicated any signs of the Silicon Valley weakness spreading here.
• Positive rental growth and an improving outlook make the DC area an attractive destination. As the nation looks towards the impending election, we are naturally focused on DC-area job growth. One area to watch is the differential between Class A and B properties. EQR has seen parity in rental growth between the two, while others continue to see B’s outperform.
• AIV is our favorite apartment name, given its continued combination of expected growth and attractive valuations. We also continue to like MAA over the next 12 months, but its acquisition of PPS may limit near-term price appreciation. Given EQR’s recent sell-off (and competitor downgrades), we believe the stock has the highest risk as well as the highest reward among the peers.