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.

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: Triple-Net - Triple-Net REIT Comp Sheets 9/5/2016

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riple-Net REIT Comp Sheets 9/5/2016

• REITs Rally On Job Report, Sector Underperforms. The overall REIT sector gained 180 bps this past week and is +14.7% YTD. The triple-net sector underperformed, +130 bps for the week and is +32.8% YTD.

• Dividend Yield. Triple-net REITs are trading at 16.8x 2017E FFO as compared to equity REITs trading at 18.0x. The current dividend yield for the sector is 4.58% vs. the REIT sector dividend yield of 3.65%. The 93 bps spread is 70 bps below the long-term average spread of 163 bps.

• Real Estate Receives Its Own GICS Classification. As of the close on August 31, the real estate sector was separated from financials and became the 11th Global Industry Classification Standard (GICS) by S&P and MSCI. The changes will be implemented on September 16th.

• GPT Announces More Transactions. Gramercy Property Trust (GPT, $9.64, Buy) announced they have sold three more single-tenant office buildings in Princeton, New Jersey, Burlington, Massachusetts, and Bloomington, Minnesota as well as a single-tenant industrial property in Phoenix, Arizona for $206.7 million or a 7.4% forward cash cap rate. The properties had a weighted average lease term of 10.1 years. The company has $158.6 million of assets under contract with an additional $117.8 million being marketed. If those sales close, total dispositions would be $1.5 billion at a 6.8% cap rate, over 12 months ahead of the anticipated schedule. The company also announced two more acquisitions in the Chicago MSA for $60.2 million or a 6.6% cash cap rate with a weighted average lease term of 17.2 years. An additional $342.6 million of assets are under contract/LOI at a 6.75% cap rate with a weighted average lease term of 12.2 years. Total acquisitions are $905.5 million at a 7.0% cap rate with a 12.4 year weighted average lease term.

• STOR receives Investment Grade Credit Rating From S&P. Store Capital Corporation (STOR, $29.64, Buy) received a BBB- credit rating from S&P with a positive outlook. STOR already obtained an investment grade rating from Fitch last November.

Priced as of close 9-2-2016.

NOMURA: Japan REIT sector - Ongoing property sales by REITs

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Property sales constitute viable option even if pros and cons are not immediately apparent

On 31 August Sekisui House SI Residential Investment [8973] (Buy) announced the sale of b-town Minamiaoyama, an urban retail facility. It has been selling off commercial facilities since June 2014 in order to turn itself into a specialist residential REIT, and to date had sold six properties. It had hitherto decided not to sell b-town Minamiaoyama because it was carrying unrealized losses, with appraisal value of ¥1.17bn at end-16/3 versus book value of ¥1.49bn. However, it has now managed to sell it to a third party based in Japan that made an offer of ¥1.56bn, well above the property's appraisal value and also higher than its book value. Sekisui House SI Residential Investment said that it received an offer for the property in excess of its book value because the real estate market has been buoyant recently.

DNB NEWS & RESEARCH for 8/29..UK CLOSED BANK HOLIDAY EUROPE VOLS -60%

SKANSKA:     U/G from HOLD(BUY), UP PT from SEK185(220) improved USA outlook
LUNDIN PET:  REIT BUY,  UP PT from SEK155(162) Positive Johan Sverdrup news
DETNOR:      REIT BUY,  UP PT from NOK125(128) better production level,lower cap
STATOIL:     REIT BUY,  PT NOK160support update on development costs in Norway
AURORA LPG:  REIT HOLD,CUT PT NOK22.50(11)
AF GRUPPEN:  REIT SELL, UP PT from SEK90(100) concern remains premium valuation

NOMURA: Japan Hotel REIT Investment (8985 JP) (Buy) New guidance: RevPAR growth target is 8.7%

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With no pullback apparent in lodging demand, next portfolio target is ¥500bn

Japan Hotel REIT announced new 16/12 guidance on 24 August. Compared with February, rent income projections were raised for five of the six chains paying variable rent. The rent projection for the other is unchanged from February. The REIT's new overall projection for variable hotel rental income is ¥0.2bn higher than the most recent estimate (7 July). As of February, the RevPAR (average occupancy times average room rate) target for the three main chains (Hotel Management Japan, Accor, and The B) was +8.7% y-y. Concern about changing conditions in the hotel market has been rising in the stock market, but the business environment appears to be generally in line with what management expected at the start of 2016. Moreover, property acquisitions have been brisk. Since the start of 2016 the REIT has issued new shares twice and used the proceeds to acquire five properties (including Hilton Nagoya) for ¥61.1bn (5.1% weighted-average NOI yield). We use a fair-value dividend yield of 3.25% and fair-value cap rate of 4.0% to calculate our target price. Previously we valued Japan Hotel REIT 50bp lower than the weighted-average yield indicators of the 38 REITs we cover. We now change to 25bp lower based on the increased difficulty of forecasting conditions in the hotel market. 

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

NOMORA JAPAN - Unizo Holdings (3258 JP) (Neutral) Factoring in dilution from capital increase

Aggressive investment in Washington, DC

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We have lowered our target price by 35% and retain our Neutral rating. The cut in the target price reflects the 20% increase in shares out resulting from the capital increase staged in July, as well as an increase in the cap rate we use to calculate NAV from 4.5% to 5.0%. This revision of the cap rate reflects increased uncertainty on financial and capital markets, for example from Brexit, a slowdown in office rent rises, and a slowdown in the pace of growth in hotel room rates on deteriorating corporate demand, although inbound demand is buoyant. We estimate that 80% of 17/3 NOI will come from office buildings and 20% from hotels, and we apply a cap rate of 5.0% to both property types. The revision to our cap rate is on the large side not only because of the difficulty in hiking rents on office buildings in Japan but also because of the company’s decision to spend a total of ¥50bn on purchasing three buildings in Washington, DC from July onwards, including 1100 First Street NE, which will likely result in US assets accounting for more than 30% of total property, plant & equipment as at end-17/3, and cap rates on US real estate are higher than on office buildings in the five central wards of Tokyo.

Robert Stevenson Update: Community Healthcare Trust Inc (CHCT) - BUY 2Q16 Earnings REITView: Solid results; raising FV to $24

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Flash Takeaways:

CHCT reported 2Q16 FFOPS of $0.32 (Normalized was $0.34). We were at $0.31 per share, while consensus was at $0.32 per share. The 3 acquisitions ($33.5M) in 2Q16 and the 4 in the pipeline ($13.4M) are the main takeaways.

Analysts Notes:

• Occupancy 93.0% at June 30. At the end of 2Q16, CHCT had investments in 48 properties and mortgages across 18 states, totaling roughly 1.1 million square feet, that were 93% occupied. We note that leases representing 7.2% of CHCT’s annualized rent will expire in 2H16, with roughly 12.2% expiring in 2017.

• CHCT acquires 3 properties in 2Q16 for $33.5M. The 3 properties were 93.7% leased overall and total 153K square feet. CHCT had previously announced the acquisition of a 13,835 square foot surgery center in Arizona for $3.1M (100% leased) and the 85,000 square foot behavioral hospital in Des Plaines, IL for $20M (100% leased), for which CHCT had previously extended a $12.5M mortgage loan and subsequently exercised their purchase option. In addition to the two previously announced acquisitions, CHCT closed on a 54,611 square foot MOB in Independence, Ohio for $10.4M (82.3% leased).

• Credit facility increased by $75M; dividend increased by $0.0025. On 8/10/16, CHCT increased the size of their credit facility from $75 million to $150 million, while also reducing their interest rate by 25bps. Additionally, the quarterly dividend increased by $0.0025 from $0.3775 to $0.3800.

• Pipeline currently 4 properties totaling nearly $13.4M. CHCT has purchase agreements on four properties for a total cost of $13.4M. CHCT estimates an expected return on these properties in the range of 9.16%-9.97%.

• Increasing 2016 FFOPS estimates. Given 2Q16 results, we are increasing our 2016 FFOPS estimate from $1.37 to $1.39 and our 2017 estimates from $1.53 to $1.57. Consensus is at $1.46 and $1.66, respectively. We are maintaining our Buy rating and are increasing our Fair Value estimate from $23 to $24.

Daiwa House Industry (1925 JP) (Buy) 17/3 Q1 results

Sale of logistics facilities to private REIT in Q1

Daiwa House Industry released 17/3 Q1 results on 9 August. We had thought that its results might be hit by the disappearance of substantial gains on the sale of logistics and commercial facilities in 16/3 Q1 (¥24.5bn at the gross profit level), but in the event operating profits rose 4% y-y (and included gains on property sales of ¥12.9bn). This mainly reflected the housing business, where sales rose 13% and the gross margin improved from 19.4% to 20.5%. However, we had already expected this gross margin to improve in 17/3. Although progress with construction projects has been rapid, the amount of work at hand has not prompted us to change our outlook for housing operations in 17/3, or indeed our earnings forecasts. We retain our target price and reiterate our Buy rating amid favorable conditions.

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