STIFEL: SBRA ($25.46, Hold) - Post 2Q16 Update: Reducing GEN Exposure; Forest Park Largely Settled; Raising Estimates, but Maintain Outlook

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Post 2Q16 Update: Reducing GEN Exposure; Forest Park Largely Settled; Raising Estimates, but Maintain Outlook

SBRA is marketing GEN properties to reduce exposure. Pipeline and liquidity look good. We are raising estimates on 2Q performance, but given the pressures on SNF census and coverage, maintain neutral outlook.

 
Raising Estimates for the 2Q16 Beat: We are raising our 2016 FFO/FAD to $2.29/$2.21 from $2.25/$2.11 due to the 2Q16 beat, better than expected investment activity post quarter, and higher straight line rent as management is not expecting write-offs of accumulated rent receivables and higher GAAP rents due to lease extensions. We are also raising our 2017 FFO/FAD to $2.32/$2.28 from $2.30/$2.20.

Reducing GEN Exposure: SBRA entered into an agreement with Genesis Healthcare (GEN - Hold-$2.30) to market 29 additional facilities leased to GEN. Total dispositions will reduce GEN from 78 properties to 43 or around 27% of revenues. SBRA expects to receive $200M to $250M in net proceeds from the sale of GEN assets which they believe could be accomplished by 2Q17- end.

Solid Pipeline & Liquidity: Post-quarter, Sabra invested $87.6M in two seniors housing and one skilled nursing property and announced it would invest an additional $22M in a senior housing property. The 3Q investments topped what we had modeled. Management is optimistic about the investment pipeline which they peg at $300M and is comprised of mostly assisted living and memory care properties. SBRA has ample pro forma liquidity (over $500M) so we do not see a need to raise equity near term.

Forest Park Fully Repaid; Guarantee Recovery Potential: SBRA received full repayment on the Forest Park loans in the amount of $285.5M, which included $8.9M prior period interest income and fees. There is potential to collect additional funds from tenant lease guarantee. SBRA has offered a discount to the amount owed to speed up the collection process, but management is open to pursuing litigation.

Coverages Contract, Not Surprised: Same-property stabilized skilled nursing coverage contracted to 1.26x from 1.34x sequentially, including Sabra's largest tenant, Genesis Healthcare, which reported fixed charge coverage decline to 1.27x from 1.34x in 1Q16. We were not surprised by this given GEN's weak 4Q15 and 1Q16 performance. Holiday Retirement portfolio held steady at 1.18x.

Maintain Outlook: Overall we view 2Q as positive. SBRA received full payment on the Forest Park loan and is reducing its GEN exposure and tenant concentration. However, there is uncertainty surrounding the amount of future rent credits awarded to GEN (in the amount of 7.5% of the net proceeds on GEN asset sales). Given ongoing supply risks in senior housing and pressures on skilled nursing census, we maintain our neutral outlook.

DNB NEWS & RESEARCH for 8/26....JANET YELLEN 11 AM NY TIME JACKSON HOLE Inbox x

SEADRILL:   -2% GS REIT SELL, market conditions remain challengingBW LPG:     REIT BUY,CUT PT from NOK50(43)believe likely to bid for Aurora Q4
OFFJELL:    REIT BUY, PT NOK46 Our view +tive that CEO says all LPG newbuilds are likely to be cancelled.
SEVAN MAR:  REIT SELL,CUT PT from NOK15(14)  likelihood of M&A has reduced ST
YARA: REIT SELL, PT NOK200.........Struggling to raise prices
SEADRILL:   -2% GS REIT SELL, market conditions remain challenging

Japan construction and real estate market - Sekisui House trying housing-to-hotel shift

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Serviced apartments arrive in Otemachi too

Sekisui House [1928] has decided to develop long-term-stay serviced apartments targeting chiefly wealthy people from overseas in Akasaka 5-chome, with completion scheduled for 2020. The property is to have 223 guest rooms and will apparently involve a total investment of about ¥25bn including the cost of the land. Sekisui House is to handle the development and own the property, which is to be managed by Frasers Hospitality Pte Ltd, a member of the Singapore-headquartered Frasers Centerpoint Limited Group. In our view, the property could in the future be sold to an affiliated REIT. Sekisui House in June 2010 completed the Honmachi Garden City property in Osaka, which houses the St. Regis Osaka Hotel on its high-rise floors, and recently completed the redevelopment of the Hotel Fujita Kyoto acquired in 2006 from Fujita Kanko [9722], which opened a few years as the Ritz-Carlton Kyoto. We see an increasing possibility of the company expanding operations in the hotel field—something to watch for the future.

NOMURA: Japan REIT sector - Conditions at two hotel REITs

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Differing views on RevPAR growth, based on differences in exposure to Tokyo, pricing, formats

Invincible Investment [8963] (Buy) announced 16/6 results and 16/12 guidance on 23 August, followed on 24 August by Japan Hotel REIT Investment [8985] (Buy), which announced 16/12 H1 results and 16/12 full year guidance. Below, we summarize conditions at these two major hotel REITs, and the differences between them.

STIFEL: PEI ($24.49, Buy) - Management Meetings Highlight Improved Portfolio and Further Portfolio/Balance Sheet Improvements Ahead

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Management Meetings Highlight Improved Portfolio and Further Portfolio/Balance Sheet Improvements Ahead

We recently hosted a series of management meetings with PREIT CEO Joe Coradino and Head of Investor Relations, Heather Crowell. PEI’s transformed portfolio is well-positioned to thrive in the uncertain retail environment, in our view. The disposition of 14 lower productivity malls has been the biggest component PEI’s transformation. The dispositions along with occupancy gains and significant re-tenanting activity have improved PEI’s portfolio metrics and strengthened PEI’s long-term growth profile. PEI has used the disposition proceeds to reduce leverage and grow its unencumbered asset pool. PEI is focused on reducing leverage further through additional asset sales and growing cash flow through the stabilization of Springfield Town Center and redevelopment completions. We maintain our Buy rating and $27 target price based on a 7% discount to our $29 NAV estimate at a 6.25% cap rate.

• Portfolio fundamentals are healthy and PEI sees a clear path to achieving its goal of sales psf above $500. Sales increased to $460 psf from $458 psf at quarter-end following the sale of Washington Crown Center in 3Q. Further asset sales (Beaver Valley Mall) and the stabilization of Springfield Town Center and Fashion Outlets of Philadelphia (estimated sales psf $600+) should allow PEI to achieve its sales psf goal.

• PEI expects a mix of outlet, traditional retail, and entertainment at The Fashion Outlets of Philadelphia. Nearly 50% of the GLA is in various stages of lease documentation and PEI is seeing healthy retailer demand for space. The large-scale redevelopment is a 50/50 JV with Macerich (MAC, $82.65, Hold). PEI estimates redevelopment cost of $160-$190 million (at share) and has received $128.5 million of public financing and could receive an additional $30 million that will help determine the scope of the redevelopment. PEI could have a response by Labor Day on the additional $30 million. The project will open in the spring of 2018 with projected stabilization in 2020. The project entails significant execution risk and we expect PEI will provide numerous updates as the project moves forward to allay investor concerns.

• PEI has used disposition proceeds to reduce debt, but debt-to-EBITDA is 7.8x, above the mall REIT average. PEI is targeting a debt-to-EBITDA below 7.0x and plans to get there through a combination of asset sales and higher cash flow from improved operations and redevelopment completions, but it will take time for PEI to achieve its leverage goals. PEI has six redevelopments in-process for roughly $250 million with a shadow pipeline of identified potential projects.

• PEI is marketing Beaver Valley Mall for sale, its 50% interest in one power center under LOI, and is under contract to sell the office space at Voorhees Town Center. PEI is marketing its 50% interest in two remaining power centers. PEI expects to complete the sales in late 4Q and/or early 2017.

• PEI is also continuing to evaluate whether to sell ownership stakes (20%-40%) in a few centers. The JV sales will help PEI reduce leverage while providing some price discovery for their improved portfolio. While there has been sales of “C” and lower tier “B” malls, there has not been any recent sales of high quality “B”/lower productivity “A” malls. PEI believes the sale of an ownership stake in a few malls, a lower-end Premier Mall and one or two higher-end Core Growth malls could provide a positive valuation for the portfolio, demonstrating the value created by the portfolio transformation.

• PEI generated same store NOI of 4% in 2Q as growth was positively affected by 200-250 bps by the inclusion of Springfield Town Center. PEI will continue to receive an outsized benefit from Springfield Town Center in 2016 and into 2017 as signed leases come online and growth annualizes. Physical occupancy is 82.3%, but will increase throughout 2H16 and 2017. A new Saks Fifth Avenue Off 5th will open in a few weeks.

• PEI did not have any closures in its portfolio from Aeropostale or Pacific Sunwear. The 300 bp gap between its leased (94.3%) and physical occupancy (91.3%) should close in 2H16 with the opening of six new H&M stores. Retailer demand and PEI’s leasing leverage have improved as the portfolio has transformed. PEI expects to generate 3%+ same store NOI growth following the transformation. PEI’s 2016 same store NOI guidance is 2.8%-3.2%, but quarterly same store NOI guidance which includes Springfield Town Center is 4%-4.4%.

• The REIT does expect a handful of Macy’s to close in its portfolio following Macy’s announcement to close 100 full-line stores (out of 675). PEI has 21 Macy’s locations in its portfolio and views the closures as a positive. The REIT has redevelopment plans “on the shelf” for a couple of the locations they expect to be on the closure list. The closures are also a positive for the remaining Macy’s locations in PEI’s portfolio since Macy’s plans to invest in its full-line locations to improve the shopping experience, strengthening their malls. These malls will also take market share from lower productivity malls in the market where Macy's closes. PEI has one vacant anchor in its portfolio.

• The Macy’s store closure announcement will not be the last among the traditional department store anchors, in our view. The department store model is struggling in the competitive retail environment as changing shopping habits and large store footprints are weighing on growth and creating some uncertainty. In the last 10 years, PEI has converted 10 former department store anchors into new uses, including large format retailers, small shops, a grocer, and office space. PEI currently has four anchor redevelopments in-process. PEI is re-tenanting the former JC Penney at Cumberland Mall with Dick’s Sporting Goods, the JC Penney and K-Mart at Exton Square with Round 1 and Whole Foods, and the former Sears at Viewmont Mall with Dick’s Sporting Goods and Field & Stream. These redevelopments begin to come online in 4Q16 and continue throughout 2017.

• The execution on the redevelopment of the former Gallery in Philadelphia into Fashion Outlets of Philadelphia, anchor redevelopments, and other redevelopment projects are significant for PEI. Successful execution on the pipeline will continue to move PEI's productivity toward its higher productivity mall REIT peers by enhancing PEI's long-term internal growth profile and improving sales productivity.

• PEI has been reducing its exposure to struggling anchors through asset sales and the proactively recapturing space when possible. PEI’s Sears exposure is down to 16 from 29 four years ago and PEI sees the number falling into the single digits over the next few years through asset sales and proactively recapturing locations when a new user is identified and a lease is signed.

Target Price Methodology/Risks

Our $27 target price is based on a 7% discount to our $29 NAV estimate at a 6.25% cap rate. Risks to our target price include a broad-based economic downturn or recession, interest rate movements, and general market risk. Company-specific risks include a weakening of commercial real estate fundamentals and balance sheet risk.

STIFEL: HPT ($30.39, Buy) - Adjusting Estimates For Bond Redemption

Hospitality Properties Trust: $HPT – NASDAQ

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Adjusting Estimates For Bond Redemption
Redeeming 2017 Bonds. Hospitality Properties Trust announced that the company will redeem its 5.625% Senior Notes due 2017 that mature in March 2017. The notes are the company's only 2017 maturity.
 
Recently Raised Equity. Last week the company priced 12.65 million shares of equity at $30.75 for net proceeds of $372.6 million.

Adjusting Estimates. We are adjusting our 2016E normalized FFO to $3.68 (from $3.66), to $3.94 (from $3.93), and our 2018E normalized to $4.10 (from $4.09). Our original estimates assumed the bonds would be repaid in March 2017.

Above Dividend Yield In The Sector. HPT's annual dividend of $2.04 per share represents a current yield of 6.7%. We wouldn’t be surprised to see the company continue to raise its dividend going forward.

Balance Sheet. Net debt+preferred-to-EV is 40.8% and net debt-to-2017E EBITDA is 3.8x.

Valuation. Shares trade at 9.9x adjusted 2017E EBITDA of $830 million. Our $31.50 NAV estimate assumes a 9.5x multiple on the truck stops forward lease payments coupled with a 10.5x multiple on the lodging forward EBITDA.

Target Price Methodology/Risks
Our target price of $34 reflects a 10.4x multiple on our 2018E EBITDA of $851 million.

Risks to Target Price:

Lodging generally follows economic cycles, and a sustained economic downturn could negatively impact the sector’s profitability.

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

NOMURA - MCUBS MidCity (3227 JP) (Buy) 16/6 results

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Internal growth, lower funding costs ensure steady rise in DPU, potential for regular acquisitions?

Occupancy remained high at the two flagship properties in Osaka Business Park, up 0.4ppt from 97.6% at end-15/12 to 98.0% at end-16/6 at Twin 21, and flat at 97.1% over the same period at the Matsushita IMP Building. Elsewhere at office buildings in the Honmachi area, occupancy rose from 87% to 100% at the MID Midosujikawaramachi Building, and rose by 2.2–3.0ppt at other office buildings, with no declines in occupancy at any buildings. This reflected a decline in the amount of office stock as a result of older office buildings being redeveloped as hotels in addition to improved economic sentiment, and suggested that conditions on the Osaka office market may now have bottomed out, having hitherto given cause for concern. Guidance for 16/12 calls for rental income from properties in the Osaka Business Park to rise as rent-free periods come to an end, but for only a minimal impact from properties in the Honmachi area, which account for a smaller portion of rental income.

Balder (Buy) – Q2: operative profit slightly above consensus, value changes 1.5% in the quarter

Balder (Buy) – Q2: operative profit slightly above consensus, value changes 1.5% in the quarter (market comment)
 
Balder Q2 2016 results
·         Rental income at SEK 1,307m, up 98% y-on-y and 1% below our 1,322m estimate, in line with consensus of SEK 1,305m

·         Net operating income at SEK 896m, 1% below our SEK 901m expectation and 1% above consensus of SEK 885m. Property costs were SEK 411m compared to our estimate of SEK 421m

·         Profit before from property management at SEK 643m, 3% below our expectations of SEK 666m as financial costs were SEK 245m compared to our estimate of SEK 235m and administration costs were SEK 123m compared to our estimate of SEK 108m. Profit from property management was 2% above consensus estimate of SEK 633m

·         Value changes: unrealized value changes of SEK 1,021m equivalent to 1.5% of the property value (we expected 1.0% or SEK 700m). The increase is attributable to improved operating income and slightly lower yield. The property valuation yield was unchanged at 5.4%

·         NAV: EPRA NAV declined marginally from SEK 170.15 after Q1 to SEK 169.39 at the end of Q2. Equity per share declined from SEK 136.39 in Q1 to SEK 132.45 in Q2

·         Earnings capacity increased  slightly from Q1; profit from property management in current portfolio is SEK 2,190m on a twelve month basis compared to SEK 2,050m at the end of Q1

 
Conclusion: the Q2 report is largely in line with consensus estimates and should not lead to significant earnings revisions. Property value changes above our expectations as has been the case for basically all Swedish real estate companies in Q2. The share price reaction should be neutral to slightly positive on the small positive deviation to consensus.