JEFFERIES - SEGRO (SGRO LN, HOLD, PT: 425.00p)

FULL REPORT

First View: Cash Box for Development Funding [Mike Prew, Andrew Gill]

SGRO 9.9% cash box placing of 74.8m new ords to raise c. £340m to fund near-term development and capture the pick-up in pre-leasing activity in core markets with £6m net rent signed since 30 June. Accompanying trading update reaffirms continuing pick-up in UK tenant demand post BREXIT vote. £456m of cap ex has been identified over the next 2yrs of which £199m is committed to the current pipeline and a further £140m on the potential pipeline which are either pre-let or agreed subject to planning approval.There are further speculative, urban warehouse development projects totaling £117m, of which management expects most to commence within the next 6 to 12mths subject to continuing favourable occupier markets. The shares have bounced to a -3% discount to NAV and yield 3.6% after the sector fillip on GICS reclassification of REITs as a separate S&P/MSCI sector (1/9/16). Should have been debt financed and confirms our suspicion that the sector is expensive post the BREXIT currency bounce.

JEFFERIES - UPCOMING US CORPORATE ACCESS

Detroit REIT Tour 10/30/2016

Denver REIT Tour 9/8/2016

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

FULL REPORT
FULL MODEL

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?

• Please find our 2Q16 Office market fundamentals update here: Houston Free Fall. San Francisco and Boston Solid, Los Angeles Hype Not in Numbers. 2Q16 Office Fundamentals Update. While concerned about the Silicon Valley, the rest of the KRC markets are relatively solid.

• 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.

Janney/IRET: IRET selling Senior Housing portfolio for $280M; Positive for the stock

FULL REPORT

Investors Real Estate Trust (IRET) - BUY

IRET selling Senior Housing portfolio for $280M; Positive for the stock

Flash Takeaways:

IRET announced it entered into agreements to sell 26 senior housing properties and 1 multifamily property for $236M. While we had been expecting IRET to announce a significant amount of non-core asset sales next week in concert with its F1Q17 earnings, we view the potential exit of the senior housing business for gross proceeds of nearly $280M to be a significant positive for the stock.

Analysts Notes:

• Selling additional senior housing assets to Edgewood. On August 31, IRET announced that it had entered into six separate sales agreements with affiliates of Edgewood Senior Living to sell 26 of IRET's senior housing properties (Edgewood currently operates 25 of the 26 assets) and one multifamily asset for gross proceeds of $236M.

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• Entire senior housing portfolio could be gone for $279.5M. If this transaction closes (expected in calendar 2017), along with Edgewood’s previously exercised purchase option on 8 other senior housing properties in Idaho for $43.5M, IRET will have sold its senior housing portfolio for $279.5M of gross proceeds.

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• The six transactions are subject to various conditions (including each sale being contingent on the closing of the other sales) and breakdown as follows: (1) 5 properties with 386 units in Cheyenne, Casper, and Laramie, WY for $53.0M; (2) 2 properties with 256 units in Hermantown, MN for $36.8M; (3) 4 properties with 220 units in Virginia, MN, Kalispell, MT and Omaha and Hastings, NE, for $32.3M; (4) 5 properties with 514 units in East Grand Forks and Brainerd, MN, Bismarck and Fargo, ND and Rapid City SD for $71.0M; (5) 9 properties with 278 units in ND, SD, NE, and MT for $28.8M; and (6) 1 property with 97 units and one townhome property with 24 units in Sartell, MN for $14.0M.

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• We are maintaining our Buy rating on IRET, as we view this transaction (when it closes) as a positive for IRET's repositioning efforts, as well as a positive for the stock. We are also maintaining our $7 Fair Value estimate and our F2017 FFO per share estimate of $0.47 at this time.

NOMURA: Japan REIT sector - Ongoing property sales by REITs

FULL REPORT

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.

STIFEL - Retail REIT Comp Sheets 8/29/16

FULL REPORT 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.

STIFEL: GPT ($9.62, Buy) - Disposition Volume Exceeds Initial Targets & Ahead Of Schedule

FULL MODEL

FULL REPORT

Disposition Volume Exceeds Initial Targets & Ahead Of Schedule

Capital Recycling Plan At GPT. Last summer, Gramercy Property Trust's management put together and presented a capital recycling plan to reshape the company's portfolio post the closing of the merger with CSG. The merger closed in mid-December andGPT has executed on that plan over the last eight months. With the recent sale of four assets, GPT has exceeded its original plan to sell $1.15-$1.23 billion over a 24-month period. We believe, once all of the sale proceeds are redeployed, the company should have a high-quality portfolio with predictable and growing cash flows and a strong balance sheet that should result in a higher multiple.

Triple-Net Sector Has Lagged MTD. The triple-net sector has been lagging MTD -6.5% vs. the RMS -3.8%. The sector has underperformed due to the possibility of the Fed raising rates at the upcoming meeting in September

GPT Has Lagged Triple-Net Sector YTD. YTD, GPT is up 27.8% vs. the triple-net sector +31.5% and RMS +13.9%.

Presented Plan At Investor Day Last September To Reposition Portfolio. Last September, management presented a plan to reposition the combined CSG/GPT portfolio by selling assets in two phases. The first phase was to take place throughout 2016 and was intended to reduce the company's exposure to non-strategic multi-tenant and single tenant suburban office assets by selling $725-$775 million at a 6.2%-6.7% cash cap rate. The second phase was to take place over the longer-term, by year-end 2017 and hoped to sell $420-$450 million of office assets with shorter lease terms at a 7.3%-7.9% cap rate. In total, GPT hoped to sell $1.145-$1.225 billion of assets at an average cap rate of 6.7%-7.2%.

Sells Four More Assets. Yesterday, the company announced that it has 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.

Has Exceeded Expectations With Over $1.26 Billion Sold. YTD, GPT has sold $1.26 billion of primarily single and multi-tenant office assets at a weighted average 6.6% cap rate.

More Assets Under Contract & Being Marketed. 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.

Use Of Proceeds. Management intends to use the proceeds from asset sales and balance sheet capacity to reach a target asset allocation of 75% industrial and 25% office/specialty.

Acquisition Update. In 2Q, GPT purchased $354.9 million of assets at a 7.3% cap rate with a weighted average lease term of 12.0 years. QTD, an additional $155.2 million have closed at a 6.6% cap rate with a weighted average lease term of 12.1 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

U.S. Portfolio As Of 12/31. As of 12/31, U.S. portfolio NOI consisted of 47.0% office, 45.0% industrial, and 8.0% specialty retail.

Pro Forma For The Current Sales. Pro forma U.S. portfolio NOI consists of 60.7% industrial, 34.7% office, and 4.6% specialty retail. Office exposure will continue to come down as sale proceeds are recycled into industrial assets. Management hopes to reduce office exposure to 25.0% by year-end.

Reduced Joint Venture Exposures. With the dissolution of the Duke joint venture and the sale of a large portion of the Goodman joint venture in 2Q, equity investments has been reduced from $580 million to $105 million. Unwinding most of the joint ventures, should provide a cleaner story.

Merger Fully Integrated, Synergies Ahead Of Initial Estimates. The integration with CSG was completed earlier this year. Original synergy estimates were $15 million. Realized synergies are $16-$20 million.

GPTE Gaining Scale, Taking Longer To IPO. Gramercy Europe is a joint venture between GPT, EJF Capital LLC, Fir Tree Partners, and Senator Investment Group LP. The venture owns over 30 assets with almost 10 million sf of that 100% occupied with a weighted average lease term of 8.6 years for a total purchase price of €623.0 million. Over 50.0% of the assets are located in Germany, 25.0% in the Netherlands, and the remainder in France, Poland, and the UK. The pace of capital deployment has been slower than expected.

Wide 2016 Guidance Range To Be Narrowed With 3Q Release, Could Provide 2017 Guidance. With its 2Q release, GPT maintained its 2016 core FFO and AFFO guidance of $0.66-$0.75/share. The guidance midpoint implies 15.6% FFO growth this year. The wide range was maintained as management was waiting to have a better handle on the timing of new acquisitions. Guidance will be addressed with its 3Q release. Management could also release 2017 guidance with its 3Q release. The Street is projecting high-single digit AFFO growth next, some of the highest in the sector.

Maintaining Estimates. We are maintaining our 2016, 2017, and 2018 core FFO estimates of $0.75, $0.79, and $0.84. We are maintaining our 2016 GPT-defined AFFO estimate of $0.70, $0.76, and $0.82. GPT strips out capex below AFFO. If we strip out $24 million of capex in 2016 and $16 million in 2017 to calculate AFFO, our 2016 and 2017 AFFO estimates are $0.64 and $0.73, respectively.

Expected to Address Quarterly Dividend Rate Later This Year. GPT's annual dividend payout is $0.44/share a or 4.6% dividend yield. The dividend will likely be raised later this year.

Balance Sheet. GPT has $2.24 billion of debt, $223 million of cash, and $757 million of undrawn line capacity. Gramercy’s balance sheet has net-debt+preferred to EV at 33.6% vs. the industry average of 32.7%. Net-debt+preferred/EBITDA is 4.7x, one of the lowest in the industry.

Valuation. Our 2Q NAV per share estimate of $8.25 reflects a 6.75% cap rate. Our value range of $9.25-$7.25 reflects cap rates of 6.25%-7.25%. Shares trade at an implied 6.1% cap rate.

Target Price Methodology/Risks

Our $10.50 target price reflects 12.8x our 2018 AFFO estimate of $0.82.

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.

JANNEY: REITS Mirror, Mirror: 2Q16 Revisions to Apartment Same-Store Estimates

FULL REPORT

We are updating our 2016 and 2017 same-store NOI, revenue, and expense growth estimates for the 8 major apartment REITs following 2Q16 earnings (see Figure 1). Importantly, our estimates continue to be predicated on a US economy (including job growth) and interest rates similar to today going forward. We are also not expecting any significant benefit in 2017 from the “odd year bounce” of the last few years. On a weighted average basis, we now expect 4.8% SS revenue growth and 5.5% SS NOI growth for the peer group in 2016 (-10bps from last quarter), and 4.0% and 4.4% in 2017 (-10bps from last quarter), respectively.

AIMCO (AIV) – Management SS NOI growth guidance is +5.5% to +6.5%, with a YTD actual of +5.5%. We are expecting +4.6% SS revenue growth and +5.7% SS NOI growth in 2016, and +4.0% and +4.4% in 2017. Our 2016 estimates are consistent with our previous estimates (following 1Q16 earnings), while our 2017 NOI estimate improved 30bps.

AvalonBay (AVB) – Management SS NOI growth guidance is +5.0% to 5.75%, with a YTD actual of +6.4%. We are expecting +4.7% SS revenue growth and +5.6% SS NOI growth in 2016, and +3.9% and +4.3% in 2017 based on additional softening in NYC and SF. Our 2016 estimates have been revised downward (consistent with AVB’s own guidance), while our 2017 estimates are marginally lower (-10bps).

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Camden (CPT) – Management SS NOI growth guidance is +4.0% to +4.5%, with a YTD actual of +5.1%. We are expecting +4.2% SS revenue growth and +4.4% SS NOI growth in 2016, and +3.8% and +4.0% in 2017. Our 2016 estimates have been revised slightly upward on lower expenses, while our 2017 estimates remain unchanged.

Equity Residential (EQR) – Management SS NOI growth guidance is +3.75% to 4.25%, with a YTD actual of +5.9%. We are expecting +3.7% SS revenue growth and +4.2% SS NOI growth in 2016, and +3.6% and +3.8% in 2017 based on additional softening in NYC and SF. Our 2016 estimates have been revised downward (consistent with EQR’s own guidance), while our 2017 NOI estimate is now 40bps lower.

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Essex (ESS) – Management SS NOI growth guidance is +7.7% to +8.5%, with a YTD actual of +8.5%. We are expecting +6.9% SS revenue growth and +8.4% SS NOI growth in 2016, and +5.4% and +6.4% in 2017 based on additional softening in NoCal. Our 2016 estimates have been revised downward by 20bps (ESS also lowered its guidance), while our 2017 estimates are roughly flat as we had been expecting some reversion to the mean on the West Coast next year.

Mid-America (MAA) – Management SS NOI growth guidance is +4.75% to +5.25%, with a YTD actual of +6.4% (note: MAA is 1 of 2 to raise their SS NOI guidance this year). We are expecting +4.3% SS revenue growth and +5.0% SS NOI growth in 2016, and +3.7% and +4.0% in 2017 as MAA has more difficult occupancy comparisons going forward. Our 2016 NOI growth has been revised upward by 70bps on both higher revenue and lower expense growth, while our 2017 NOI estimate is now 30bps higher given our expectations of continued strength. Our numbers for 2017 do not include PPS.

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Post (PPS) – Management SS NOI growth guidance is +2.5% to +3.3%, with a YTD actual of +2.9% (note: PPS is the other that raised their SS NOI guidance this year). We are expecting +3.1% SS revenue growth and +2.7% SS NOI growth in 2016, and +3.1% and +2.7% in 2017 for the legacy PPS portfolio (PPS' announced acquisition by MAA should close by YE2016). Our 2016 NOI growth has been revised upward by 40bps on slightly higher revenue and 30bps lower expense growth.

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UDR (UDR) – Management SS NOI growth guidance is +6.5% to +7.0%, with a YTD actual of +6.8%. We are expecting +5.6% SS revenue growth and +6.6% SS NOI growth in 2016, and +4.2% and +4.7% in 2017, making UDR second to only ESS in terms of expected 2017 performance. Our 2016 NOI growth remains in-line with our previous expectations, while our 2017 NOI estimate is now 60bps higher given our expectations of continued strength in UDR’s non-core markets.

Buy-rated AIV, MAA, and EQR remain our favorite names in the apartment REIT space.

FBR: Self-Storage REIT UPDATE

FULL REPORT Storage REITs underperforming year to date. Storage REITs have posted a total return of –8.74% year to date, underperforming the RMS REIT Index by 2,168 bps. Last week, storage REITs were –0.33%, outperforming the RMS REIT Index by 11 bps.

Japan REIT sector - REITs up despite ex-dividend date for 11 REITs

FULL REPORT

Stocks should benefit from BOJ buying, REITs seem also to be in favor

TOPIX rose 2% on 29 August from the previous trading day. The main factor was likely the yen's retreat following the Fed chairwoman's lecture and comments by BOJ Governor Haruhiko Kuroda at the symposium at Jackson Hole, Wyoming, on 26 August. Amid these conditions the TSE REIT index rose 0.5% on 29 August despite it being the ex-dividend date for REITs with August-ending fiscal periods (ie, 11 of the 54 REITs). After nearly doubling its annual ETF buying target to roughly ¥6trn (from ¥3.3trn) at the 29 July Monetary Policy Meeting, the BOJ bought ¥71.9bn in ETFs on both 25 and 26 August, roughly double the daily amount of BOJ ETF buying up to 3 August. Even so, TOPIX continued to fall d-d on 25 and 26 August. On the other hand, the BOJ did not buy REITs on 25 or 26 August, but the TSE REIT index rose each day nonetheless. Judging from these market conditions, our view is that market participants feel safer in REITs than stocks.