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: 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

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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:

  

Below, we have our 2Q16 Earnings wires for each company under coverage (in chronological order from most recent reporter to first reporter):

 

      
  • 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.
     
  • 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.
      
       


Links to our most recent office and industrial REIT sector wires follow:

    

 

  

STIFEL: KRC ($72.63, Buy) - Gold Rush in San Francisco; Target Price $80/sh; Maintain Buy

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Gold Rush in San Francisco; Target Price $80/sh; Maintain Buy

  • We have chosen to run the numbers by hand and have come up with the following conclusion: selling a 44% interest in two assets for $508mm ($1.155B at 100%), a value over 2.7x the cost to acquire the assets, creates value and increases NAV.
  • Kilroy acquired the two assets, 303 Second and 100 First Street, in 2010 for $354/SF. The just announced joint venture values these two assets at $963/SF and a quoted 'low 4%' cash cap rate.
  • We think the transaction underscores the willingness of offshore global capital to pay very full prices for assets in barrier-to-entry markets and make major investments in Gateway City office REITs. We expect additional similar investments to occur selectively throughout our coverage.

 

  • After adjusting our estimates for this transaction, we are increasing our target price to $80/sh. The new target price equates to 2017E FFO/FAD/sh multiples of 22.5x/35.4x, a 4.8% implied NOI cap rate and a TEV of $637/SF, versus our estimate of adjusted replacement cost of $538/SF.

 

  • We estimate that Kilroy Realty currently trades at very reasonable real estate valuation metrics: 1) 5.3%/4.5%/3.8% for Implied NOI, Cash Flow, and CF less G&A Cap Rates. TEV/SF of $584/SF is also reasonable relative to our estimates of $620/$538/SF for gross/adjusted replacement cost. Finally, KRC trades at a 16%/6% discount to our 4.5%-5.0% NAV range.

 

  • This accentuates the pivotal question with REIT valuations -- does a discount to NAV and other attractive real estate valuations offset historically high FFO/FAD multiples?

 

 

  • While clearly Net Asset Value accretive, the transaction will result in cash staying on the balance sheet until spent on development, and near term earnings dilution.

 

  • We are adjusting 2016 FFO/FAD/sh estimates to $3.38/$2.19 from $3.40/$2.21 and our 2017 FFO/FAD/sh to $3.55/$2.26 from $3.57/$2.27. We estimate the normalized 2015-2017 FFO/FAD growth to be 5.0%/7.7%.

Target Price Methodology/Risks

  • Our target price of $80/sh, equates to 22.5x/35.4x on our updated 2017 FFO/FAD/sh estimates of $3.55/$2.26 and an implied NOI cap rate of 4.8%.
  • Risks to achieving our target price include development and lease-up risk, tech bubble fears, interest rate and general economic risk.

STIFEL - Retail REIT Comp Sheets 8/29/16

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REITs were down 0.44% last week, but are up 12.9% YTD. Retail REITs are slightly outperforming the REIT index YTD, up 13.1%, as regional malls are up 11.6% and shopping centers are up 15.5%.


The REIT sector is trading at a 1.8% premium to NAV. Regional malls are attractively priced to the REIT sector, in our view, trading at an 10.5% discount to NAV, while shopping centers are trading at a 5% premium to NAV.

 
  • Forest City Realty (FCEA, $23.41, Not Covered) announced the Board of Directors has authorized a process to review strategic alternatives for its retail portfolio, which consists of ownership interests in 14 regional malls throughout the country and 19 specialty retail centers located primarily in New York City. FCEA expects to conclude the review process by 1Q17. If FCEA does a retail portfolio transaction, it would redeploy the proceeds into their apartment and office assets that better align with their focus on urban, mixed-use assets. A few of the mall and shopping center REITs could be interested in some of the assets, but FCEA owns less than 100% in many of their retail centers and doesn’t manage some of the centers, which could make them less appealing to the public REITs.
 
  • Long-time Equity One (EQY, $30.88, Hold) President, Thomas Caputo, is departing the company on December 31, 2016 when his employment agreement expires. Mr. Caputo has entered into a consulting agreement with EQY for January 1, 2017 through December 31, 2017 to provide consulting services on acquisitions and other strategic opportunities. Members of EQY’s management team will assume Mr. Caputo’s responsibilities upon his departure.
 
  • Taubman Centers (TCO, $77.28, Not Covered) reopened International Market Place in Waikiki on August 25. The 345k sf open-air center is anchored by Hawaii’s first Saks Fifth Avenue. Nearly 50% of the retailers and restaurants at the center are unique to O’ahu. International Market Place was redeveloped through a partnership between TCO and CoastWood Capital Group in conjunction with the Queen Emma Land Company.
 
  • WP Glimcher (WPG, $13.55, Not Covered) completed the sale of Knoxville Center for $10.12 million. Knoxville Center was identified as a non-core asset and anchored by Belk, Dillard’s, JC Penney, Regal Cinema, Rush Fitness Center, and Sears. WPG received $3.85 million at closing and financed the remainder of the sale price with a $6.2 million loan secured by the property. The term of the loan is for one-year loan with one six-month extension option at an interest rate of 5.5%. WPG used the sale proceeds to reduce borrowings on its credit facility.
 

Performance is as of 8/26/16. Equity pricing is intraday, 8/30/16.