Where it all comes together!
| Weekly REITCap: Portfolio Managers Guide to Property REITs – September 15, 2016 | |
Our Weekly REITCap Portfolio Managers Guide provides general corporate information, total returns, valuation and balance sheet measures for 150+ property REITs across the major asset types (e.g. office, multifamily, retail, industrial), as well as more esoteric REITs (such as the prisons and towers). | |
. | |
. | |
. | |
. | |
| |
Takeaways From Management Meetings With Agree Realty Corporation
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.
On the morning of September 12, Farmland Partners Inc. (FPI – Outperform) announced that it had entered into an agreement to acquire American Farmland Company (AFCO – Outperform) in a stock-for-stock transaction, creating the largest publicly traded farmland REIT. The merger is expected to grow FPI's total acreage by 15% and should yield a combined company with a market cap of roughly $360 million based on yesterday's close. We view the acquisition as a positive for shareholders of FPI as the new company should benefit from increased scale, better access to capital, a more attractive cost of capital, and cost-related synergies, which should ultimately drive AFFO growth. We believe that increased earnings power will further support the company's quarterly dividend of $0.1275, which currently offers a ~4.5% yield to buyers at these levels. Reflecting the announcement, as well as some adjustments made to our AFFO assumptions, we are increasing our FPI estimates for FY16 AFFO per share to $0.38 from $0.19 and our FY17 AFFO per share estimate to $0.48 from $0.26. We are also modestly increasing our NAV per share estimate for FPI from $12.03 to $12.09.
REITS
Robert Stevenson,
Farmland Partners Inc. (FPI) - BUY
Buying AFCO in an all-stock transaction
Flash Takeaways:
FPI has agreed to acquire American Farmland Company (AFCO, NEUTRAL, $8.00 Fair Value) in an all-stock transaction expected to close in late 4Q16 (or early 1Q17). Each AFCO shareholder will receive 0.7417 shares of FPI stock, valuing AFCO at $8.23 per share as of Friday’s close (in-line with our Fair Value estimate). Given the length of AFCO’s strategic review process, we do not expect a superior offer to emerge.
Analysts Notes:
Deal expected to be accretive to earnings. FPI management believes that on a pro-forma basis, the transaction would increase FPI’s 2016 revenue by ~$16M (from $26M to $42M) and that it will be ~10% accretive to FPI’s AFFO per share in 2017 (~20% accretive once synergies are fully realized). We believe much of the cost savings comes from eliminating AFCO’s G&A as AFCO’s external manager (Prudential) is being retained (at least for now).
.
FPI will have a nearly $400M market cap. Already the largest and most diversified public farmland REIT, this transaction will push FPI towards $400M of market capitalization (~$850 million of enterprise value) and give the combined REIT greater liquidity. Importantly, FPI will keep AFCO's attractively priced debt in-place (FPI’s Net Debt to EV is expected to decrease from 44% to 40% post-transaction).
.
FPI will own more than 133,000 acres nationwide. With FPI's primarily row crop farmland and AFCO's primarily specialty and permanent crop farms, the combined portfolio will be composed of 293 farms (133,000 acres) across 16 states, with 2,000 acres under development and be 78% row crop, 22% permanent/specialty crop by value. FPI’s pro forma market exposures would break down as: West Coast (31%), Corn Belt (29%), Southeast (21%), Delta (12%), and High Plains (8%).
.
Cowan joining FPI as President. FPI’s existing management team will remain in-place, with AFCO’s Robert Cowan joining FPI as President, and AFCO board members D. Dixon Boardman and Thomas Gimbel joining FPI’s board (increasing the board size from 6 to 8).
.
We are maintaining our Buy rating on FPI, as well as our $12.50 Fair Value estimate.
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.
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. |
|
Mitsui Fudosan's implied cap rate at 6.5%
Looking at the spread between the implied cap rates (based on our calculations) for Mitsui Fudosan [8801] and Mitsubishi Estate [8802] since 2003, we see that while the spread between the two companies' implied cap rates has narrowed from 2.6ppt in late August, it is still at an unprecedentedly high level of 1.9ppt based on 8 September closing prices. Except for the brief time when real estate stocks dropped sharply in the wake of the global financial crisis in 2008, Mitsui Fudosan's implied cap rate has been consistently higher than Mitsubishi Estate's, and the spread between the two companies cap rates has generally been around 0-1ppt. Even in September 2014, when Mitsui Fudosan's market cap was temporarily higher than Mitsubishi Estate's due to increased expectations for Mitsui Fudosan's profit growth following its capital increase in June 2014, the spread was still only 0.4-0.5ppt. We believe this is because real estate in the Marunouchi area (the focus of Mitsubishi Estate’s portfolio) is valued higher than real estate in Nihonbashi (the focus of Mitsui Fudosan's portfolio), which results in a lower cap rate.
Near-term earnings likely to depend on real estate sales and condo business
Tokyu Fudosan Holdings has no major projects under development for long-term holding and rental until the planned completion of the Shibuya Dogenzaka 1-chome and Shibuya Nanpeidai projects in 20/3 and the Takeshiba and Shibuya Station Sakuragaoka Exit projects in 21/3. We expect the company to sell Yokohama Minatomirai 21-32, which is being developed near condominiums and slated for completion in 18/3. After completion, we expect a stable contribution to profit growth from the sale of the Higashi Ikebukuro 1-chome Cinema Complex, a project in which the company disclosed its involvement on 9 August 2016, as well as retail stores, restaurants, and business hotels in Futako Tamagawa, Ginza 1-chome, Shimbashi 3-chome, and Osaka Shinsaibashi 2-chome. Our views are unchanged, and we maintain our forecasts, target price, and Buy rating. Our target price is based on NAV calculated from a cap rate of 4.3%, and the shares look undervalued considering the implied cap rate of 5.3% based on the 8 September closing price.
REITS | |
| Weekly REITCap: Portfolio Managers Guide to Property REITs – September 9, 2016 | |
Our Weekly REITCap Portfolio Managers Guide provides general corporate information, total returns, valuation and balance sheet measures for 150+ property REITs across the major asset types (e.g. office, multifamily, retail, industrial), as well as more esoteric REITs (such as the prisons and towers). | |
. | |
. | |
. | |
. | |
| |
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.