NOMURA - Sanki Engineering (1961 JP) (Neutral) Effect of suspension not clear yet

FULL REPORT

Real estate business also warrants attention

In Apr-Jun 2016, operating losses narrowed to ¥0.3bn, from ¥0.6bn the year earlier, although Apr-Jun results make only a small contribution to full-year results owing to seasonal factors. Losses narrowed owing to an increase in revenues in the machinery systems business, offsetting an increase in provisions against construction losses in the facilities construction business, which includes the HVAC systems for buildings business. As announced by the company on 23 June, the government suspended the company from participating in bids and contracts for 30 days, from 8 July to 6 August, in connection with antitrust law violations. We will be paying close attention to the effect of the suspension on earnings in Jul-Sep and beyond. Peers that were similarly suspended in 15/3 saw earnings adversely affected in cases where the companies also refrained from actively taking on work in the private sector. We make no change to our operating profit forecasts, but we lower our target price as we cut our target P/E to 11-12x, from 16-17x previously, to reflect trends in the benchmark P/E and other factors.

 

DNB NEWS & RESEARCH for 8/30th...EUROPE +1% led by FINANCIALS

RESEARCH:
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)

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 - Maeda (1824 JP) (Buy) Focus on sales growth, concessions

FULL REPORT

Pulling away from rivals by ending its dependence on contracting work

Maeda performed well in 17/3 Q1, generating a gross margin of 9.9% on building construction projects and overall operating profit growth of 26% y-y. We raise our profit forecasts, having lifted our outlook for the gross margin on building construction projects. While some investors may be concerned that the gross margin on building construction projects is high in historical terms and offers only limited scope for improvement from 18/3 onwards, we note that the order book has been rising and that sales growth from 18/3 onwards is likely to lend further impetus to profit growth. Maeda has also established a subsidiary to operate a toll road concession in Aichi Prefecture, and it will be interesting to see how it contributes to earnings. We have raised our target price to reflect upward revisions to our profit forecasts and a rise in the benchmark P/E.

STIFEL: Office/Industrial REITs - Office & Industrial REIT Metrics Update 8/26/16 - With Two Upcoming Conference Calls

FULL REPORT Office & Industrial REIT Metrics Update 8/26/16 - With Two Upcoming Conference Calls

We will hold our semi-annual Funds Flow Update conference call on 31 August 2016 at 11 AM ET. The invitation is attached. There are a number of moving pieces including positive Japanese retail funds flows and the strength of ETF funds flows relative to weakness in actively managed funds flows. Also on the schedule is our semi-annual NAV Creation/Destruction Update conference call, which is scheduled for 7 September 2016 at 11AM ET. Again, this invitation is attached. Pricing as of close 8/26/16

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.   Despite recent positive performance following 2Q16 earnings calls, we continue to favor Gateway City office REITs including Vornado (VNO, Buy, $102.24), SL Green (SLG, Buy, $115.52), Empire State Realty Trust (ESRT, Buy, $20.98), and Kilroy Realty (KRC, Buy, $70.26) due to a combination of fundamentals, real value-add platforms and attractive valuations relative to suburban or low barrier office REITs, which are often (but not always) encumbered by weak fundamentals and a pension fund advisor type, generic platform. Along with the two invitations to our aforementioned conference calls, the most recently updated Office and Industrial REIT valuation metrics are attached as Exhibits.   Below, we have our 2Q16 Earnings wires for each company under coverage (in chronological order from most recent reporter to first reporter):   Lexington Realty Trust (LXP, Hold, $10.79) - Since the February 2016 bottom, LXP has performed nicely as a yield play rose amongst the thorns. 400 Meter Sprint. Maneuvering the Curves Easily. Maintain Hold.   Vornado - VNO continues to be a complicated story but there have been additional steps toward increased transparency 26.2 Mile Marathon or 10K Open Water Swim? Glory for Those Who Finish. Maintain Buy. We also adjusted our Price Target shortly after earnings seasons came to a close: Post Earnings Season Price Target Adjustment Up to $115/sh. Maintain Buy.   DCT Industrial (DCT, Buy, $48.72) - Continued success for our friends out in Denver who continue to be the bell cow of pure play, domestic industrial REITs. Continuing To Make it Look Easy; Adjusting Estimates; Increasing NAV; Buy and Rhythmic Gymnastics and Trampoline. Target Price up to $52/sh. Maintain Buy.   Mack-Cali (CLI, Buy, $28.07) - As CLI moves into their new Jersey City, NJ offices, they continue to execute on their two-year plan. High Jump. Scissors, Eastern Cut-off, Western Roll, Straddle or Fosbury Flop. Target Price Up to $30; Maintain Buy. Just last week Mack-Cali hosted a Gold Coast Property Tour: Triple Jump. Hop, Skip, Jump Through Apartment and Office Gold Coast Portfolio. Maintain Buy.   Piedmont Office Realty Trust (PDM, Sell, $21.45) - PDM continues to exit non-core markets slowly, but surely, and it seems the Street has taken kindly to this strategy. Race Walking. 50 Kilometer Walk. Maintain Sell.   Rexford Industrial Realty (REXR, Buy, $22.06) - As the only industrial REIT completely focused on the SoCal market, Rexford continues to succeed with their single-market focus. Sailing - Keeping the Rexford Yacht North of the Equator. Maintain Buy. TP Up to $24.50. Rexford also recently announced a preferred equity offering: Rugby Returns to the Olympics. Preferred Shares Returning to the REIT Capital Stack. Buy.   Douglas Emmett (DEI, Sell, $36.98) - 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.   Highwoods Properties (HIW, Hold, $52.93) - With one of the top management teams in REITland, HIW has been one of the top-performing office REITs of 2016 (up 24.7% vs. 14.0% for the RMS YTD in 2016). Weightlifting; Heavy Lifting Looking Easy; Maintain Hold   Armada-Hoffler Properties (AHH, Buy, $13.92) - The strategy is expanding, the portfolio is transitioning and the crew from Virginia Beach continue to be the Teflon dons in an environment that has gravitated towards yield plays. Cycling in the Velodrome. Maintain Buy. TP Increased to $15.50/sh.   First Industrial Realty Trust (FR, Buy, $28.58) - With new CEO Peter E. Baccile coming in, Mr. Duncan rides off into the sunset on a high note. Cruising Through the Preliminary Heats. Increasing TP to $32/sh. Buy.   Duke Realty Trust (DRE, Buy, $27.91) - DRE has risen up the ranks to become one of the top-performing industrial REITs YTD at 36.0% vs. 14.0% for the RMS. Decathlon Continues. More Delevering. Target Price up to $30/Sh. Maintain Buy.   Equity Commonwealth (EQC, Hold, $30.63) - 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.   Corporate Office Properties Trust (OFC, Hold, $28.83) - OFC has recovered some of their early 2016 momentum in the dog days of summer. Multiple Games at the Olympic Games. Maintain Hold.   First Potomac Realty Trust (FPO, Sell, $10.08) - FPO still has many obstacles to hurdle, but the re-shaping of the portfolio and strategy has certainly begun. Gymnastics. Perfect 10? Or Really A 9? Maintain Sell.   Terreno Realty Trust (TRNO, Buy, $26.87) - Although TRNO has been the industrial laggard under coverage, we still believe no new supply and declining inventory is a good thing. Open Water Swim. Finally Swimming with the Cost of Capital Current. Maintain Buy.   Washington Real Estate Trust (WRE, Hold, $32.65) - We recently hosted the WRE management team to some investor meetings, here are our take-aways: Maryland Athletes Win Twenty Olympic Medals While WRE Happy to Exit Maryland Office Market. NDR Recap. Hold. The strategy is being endorsed by investors and WRE is an excellent Washington, D.C. proxy, in our view. Sweltering Summer. Coolly Rowing on the Potomac. Eight Man Boat. Maintain Hold.   Empire State Realty Trust - PSA: Please stop asking about the observatory. Take a look at some of the rental rates. New Olympic Sport - ESB Stair Climb. Lease Economics Rival Stair Slope. TP Increase to $23/sh. Buy.   Parkway Properties (PKY, Hold, $17.47) - Until additional information is provided in the coming weeks on the merger-spin with Cousins Properties (CUZ, Hold, $10.73), there shouldn't be many catalysts. PKY: Synchronized Swimming. Teammates Include Cousins Properties and Oil Market. Hold. CUZ: Synchronized Diving. Synchronized to Parkway and Oil Prices. Maintain Hold. A look at our initial valuation on the merger spin-off from PKY's view: Smart and Expensive? Expensive, but Smart? Isolate Houston Purgatory. Hold. Boston Properties (BXP, Buy, $140.49) - BXP sticks to what they are great at: 1) Strong development pipeline and 2) great submarket recognition. Michael Phelps & the U.S. Swim Team. 2Q16 Earnings Analysis. Maintain Buy.   Franklin Street Properties (FSP, Hold, $12.77) - FSP is very much a dividend-yield name with low cost debt helping maintain FFO. Archery. Gradual Leveraging Up Keeps Valuation Metrics Static. Hold. FSP also recently announced an equity offering in conjunction with their acquisition of Pershing Park Plaza in Atlanta, GA as well as to fund some of the redevelopment at 801 Marquette Avenue in Minneapolis, MN. Long Jumping to Lower Leverage. Smart Equity Raise. Hold.   Kilroy Realty Trust - Even with "tech bubble" headline risk, KRC is doing too good a job to be on the sidelines. 10,000 Meter Run with Usain Bolt Leasing Expectations. Maintain Buy.   Liberty Property Trust (LPT, Hold, $40.52) - A dividend cut at a time when the incremental generalist investor is snooping around for yield plays has slowed the 2016 run-up of LPT. IOC Intervenes. Dividend Cut. More Involvement Needed. Maintain Hold.   SL Green Realty Corp. - Although SLG has underperformed the RMS (3.8% vs. 14.0%, respectively), it looks to have righted the ship and is poised for a strong finish to 2016 . Weightlifting. Positive Re-leasing Spreads vs. Heavy Lifting Related to Market Perceptions. Target Price Up to $121/sh. Buy. We also increased our price target following their recent JV partnership with Prudential for Eleven Madison: Hammer Throw. Full Block of Buildings Disappeared. As Did 40-49% of Eleven Madison. Price Target Up to $125/sh. Buy.   Brandywine Realty Trust (BDN, Hold, $16.32) - Philadelphia-centric portfolio with a significant amount of dispositions in the rear-view mirror. Mile Swim. Solid Core Portfolio. Development Projects Waiting for Anchors. Neutral Leasing Metrics -- New Analysis. Hold.   EastGroup Properties (EGP, Hold, $72.87) - Soft leasing economics rear their not so ugly heads. Steeplechase. Gather Speed; Then the Hurdles. Weak Lease Economics -- New Analysis. Downgrade to Hold.   Prologis (PLD, Buy, $53.31) - Although there are many moving pieces here, and it may be confusing to the general investor, NAV creation has continued. Decathlon. Excelling in Numerous Events. Value Creation Continues. Lease Economics Creating Value (New Analysis). Buy. Links to our most recent office and industrial REIT sector wires follow:   Please see our Replacement Cost Update here: Bonkers!! Replacement Cost - Office & Industrial - Conference Call - Thursday, July 7, 11AM (Slides Attached Below)   Our previous NAV creation/destruction call: Conf. Call 3/1/16 - NAV Creation or Destruction and Office Lease CAPEX vs MTM Analysis SLIDES ATTACHED. Dial-in Below.   Our previous Funds Flows update call: Funds Flows Update. Japanese Flows Strong. Generalist Investors the Key. SLIDES ATTACHED.   Our most recently updated, deep-dive Washington D.C. MSA wire: Conference Call -- 11 AM. 8 April 2016. Washington D.C. Office and the Cap Ex Conundrum. SLIDES ATTACHED 2Q16 Office Fundamentals - Houston Free Fall. San Francisco and Boston Solid, Los Angeles Hype Not in Numbers. 2Q16 Office Fundamentals Update.   2Q16 Industrial Fundamentals - National Vacancy Down 30 bps to 5.8% Q/Q. Elevated Starts Where Economics Work. 2Q16 Industrial Fundamentals Still Strong.   On June 18, 2015, we published our annual office REIT portfolio review - SLIDES ATTACHED - Amenity & Transportation - The Best Positioned Office REIT Portfolios - Conference Call 11 AM ET 6/19/15

STIFEL: WRE ($32.06, Hold) - Maryland Athletes Win Twenty Olympic Medals While WRE Happy to Exit Maryland Office Market. NDR Recap. Hold

FULL REPORT FULL MODEL Maryland Athletes Win Twenty Olympic Medals While WRE Happy to Exit Maryland Office Market. NDR Recap. Hold.

As the summer draws to a close, we accompanied Washington REIT on an NDR; reviewing their core portfolio and -- now that they have an attractive cost of capital -- growth opportunities. We note that while Maryland athletes won 20 Olympic medals, the WRE management noted that there is zero correlation between Maryland athletic prowess and Suburban MD office market dynamics. Hence, exiting their suburban MD office assets for $240mm and a very high $200/SF was Olympic gold for WRE.

Key take-aways included: 1) proforma the suburban office asset sales the portfolio NOI will be comprised of 46% office, 30% apartment and 24% retail, 2) deleveraging is occurring with net debt/EBITDA falling from 6.6x at 4Q15 to an expected 6.1x-6.3x by YE16, 3) strong job growth in the DC MSA is sustaining demand for apartments and retail sales, 4) the affordability gap between Class A and Class B apartments appears to be increasing, improving WRE's ability to raise rents in its Class B apartments, despite all the recent new supply delivered in the DC MSA, and 5) the appeal of METRO accessible office properties is apparent as net office absorption in Northern Virginia between 1/1/15 and 6/30/16 in assets within 1/2 mile of METRO stations is positive 1.8mm SF. For those assets further away, net absorption was negative 1.3mm SF for the same period. Sixteen of WRE's proforma eighteen office properties are within half a mile of a METRO.   One of the few REITs we cover that has an internal research team and focuses on only one market, we are always interested in the WRE perspective on the multiple asset classes and the ability to create value primarily through acquisition and redevelopment in the Washington, D.C. MSA.   Based on recent transactions and forward expectations, it appears that WRE is much more interested in spending capital on inside the Beltway Virginia-centric apartment development and redevelopment than 'office capex hogs'. Per our 2Q16 Office Fundamentals wire here: Houston Free Fall. San Francisco and Boston Solid, Los Angeles Hype Not in Numbers. 2Q16 Office Fundamentals Update. we are not at all surprised. Although there are some rays of sunshine in the greater Washington, D.C. office market, landlords are still expected to provide turnkey office space.   Additionally, please see our Washington, D.C. update wire (here). The greater D.C. office market is recognized as one of the most expensive markets in the country for re-leasing office space.   We estimate WRE currently trades at 5.9%/4.7%/4.2% implied cap rates for NOI/cash flow/CF less G&A. This equates to (9.0%)/3.0% discount/premium to our NAV estimate of $35/$31/sh using our just reduced NAV cap rate range of 5.5%-6.0%. We adjusted our NAV cap rate range as a result of the cumulative efforts to reposition the office portfolio while reducing its overall percentage of NOI. Once the suburban office asset sales are completed in 3Q16, WRE's NOI will be composed of 46% office, 30% apartments and 24% retail. We believe this is an improvement from the 4Q15 composition of 55% office, 20% apartments and 25% retail.   In addition to adjusting our NAV cap rate range, we are also adjusting our NAV static cap rate analysis to reflect the portfolio's improving quality.

• This adjustment creates a one-time pop to NAV. Where the value goes hereafter will once again depend upon management's ability to create value in a still challenging Washington, D.C. environment. WRE's improved cost of capital, should help in this respect.

• It appears as if all REITs (all sectors) that are generating reasonable (5%+) FFO/FAD growth, can grow the dividend and own institutional quality assets are trading sub 5.3%. As WRE clearly owns institutional quality assets, share price appreciation appears likely if the portfolio starts generating earnings and dividend growth.

• We think the post suburban office portfolio sale TEV for office space of $455/SF is fair relative to our recently updated $592/$433/SF estimates for gross/adjusted replacement cost.

• Other positive aspects include 1) improved balance sheet, 2) improved portfolio, 3) while the Washington, D.C. economic recovery lagged the U.S. 2011-2015, it is now exceeding the U.S., 4) Washington, D.C. leads the nation in millennial as a percentage of the population, and 5) WRE has internal redevelopment opportunities for both office and apartment assets.

• Negatives include 1) there is not a shortage of talented developers in the Washington, D.C. MSA, 2) land is available near a large number of METRO stops, 3) significant apartment supply, 4) surprising continued office development in select markets.

• We are adjusting our 2016 FFO/FAD/sh estimates to $1.77/$1.28 from $1.77/$1.32 and our 2017 FFO/FAD/sh estimates to $1.81/$1.30 from $1.80/$1.29. This equates to normalized FFO/FAD 2015-2017 growth of 2.9%/2.8%.

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

FULL REPORT

FULL MODEL

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.

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

FULL REPORT

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

FULL REPORT

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

FULL REPORT

MODEL

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.