PARETO Securities UPDATE: Victoria Park - The current portfolio is not enough

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The current portfolio is not enough

Three recently announced acquisitions have pushed the share far ahead of our target price, which is justified. Nevertheless, the full potential in the total portfolio is fully reflected in the current share price, without discounting for time and risk. Additional acquisitions would also be a trigger to the case, but should need an equity injection and would hence be less share-driving. We hike our target price to SEK 25 (17.5) but reiterate our SELL recommendation.

A larger balance sheet allows for a higher target price

The new acquisitions (see next page for details) certainly lift the warranted value and are the main reason for our target price hike – long-term potential has indeed increased. However, the recent share rally has effectively erased the potential, since we once again believe the market has discounted more than the full potential from the added property assets, in terms of earnings/value-generating renovations. At SEK 25 (our new target price), the share trades at a 4% NAV premium in a “fully renovated portfolio scenario”, given the assumptions we use. A trigger to the case would be of course new acquisitions, which to some extent are already reflected in the current price, in our view. A required yield cut would be another trigger, but is not potent enough for us to take a positive stance. We calculate ~SEK 170m in H2 2016 unrealised value increases from investments (SEK 719m for full year 2016) and SEK 502m (including SEK 42m from Limhamn co-ops) for 2017E.

Significant premium despite value growth ahead

Although we are in general positive towards the business model, value creation to a moderate risk, we cannot justify a positive stance. We calculate SEK 425-450m in value-creating capex annually for 2017-2018E, which would provide SEK 400-500m in excess property values. That will take P/NAV to 144% in 2017E and 124% 2018E, which makes us believe that the share is fully valued near term.

Complete report in attached PDF

JANNEY UPDATE: Talking Heads: 2H16 Apartment Market Commentary

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Given the sometimes meaningful differences between the various multifamily REIT management team’s experience in and outlook for the major apartment markets, we are updating our “Talking Heads” apartment market commentary report for 2H16. This report aggregates the specific market commentary from the various management team’s 2Q16 earnings calls to give investors a more comprehensive outlook for 18 key markets, as well as the relative bullishness/bearishness of the various REIT management teams.

  • The slowdown in San Francisco rent growth proved to be persistent as EQR, struggling with occupancy and rent growth, reduced growth expectations for the second time. Interestingly, the outlook between higher-end operators such as EQR and owners of more moderately priced properties continues to diverge. The latter, such as AIV and ESS, observed solid rent growth and occupancy, and in the case of ESS, reduced lease-up concessions.
  • New York’s problems remain focused on Manhattan, which according to the REITs has not generated enough high-paying jobs to absorb the market’s high-end supply being delivered. Instead, with job growth coming primarily from mid-level jobs, the borough is left with a significant supply of high price-point units and weakening rent growth relative to the outer boroughs and suburbs. AVB, EQR, and UDR all seem to have differing views of 2017 supply on a submarket basis. We expect Manhattan rent growth to remain weak over the next 18 months.
  • Seattle remains surprisingly strong as forecasters had predicted 1H16 job growth would slow from the mid-4% range, which has yet to occur. With YTD 2016 job growth of 43,400 (vs 30,000 in 2015) exceeding expectations, Seattle has been able to easily absorb the new supply coming on-line (~3.5% of inventory). Despite expected deliveries of 7,000+ units in 2016 and another 7,000 units in 2017 (on the back of ~6,000 units in 2015), Seattle’s rental rate growth remains surprisingly strong (ranging from 5% to 9% in 2Q16).
  • The Houston market faces 24,000 units coming online this year, plus another 10,000-12,000 units in 2017. We expect the market to remain weak in 2017 given the continued losses in energy employment. However, gains in other sectors and potentially moderating supply could set Houston up for a recovery in 2018.
  • While LA does not appear to be a problem area, Downtown and Marina Del Rey continue to see pockets of weakness from new housing supply. Given various submarket exposures, we expect weaker results from AVB and UDR, while others, such as ESS and EQR, appear to be less affected in 2016. Despite LA’s increasing exposure to the technology industry in places such as Silicon Beach, no REIT has indicated any signs of the Silicon Valley weakness spreading here.
  • Positive rental growth and an improving outlook make the DC area an attractive destination. As the nation looks towards the impending election, we are naturally focused on DC-area job growth. One area to watch is the differential between Class A and B properties. EQR has seen parity in rental growth between the two, while others continue to see B’s outperform.
  • AIV is our favorite apartment name, given its continued combination of expected growth and attractive valuations. We also continue to like MAA over the next 12 months, but its acquisition of PPS may limit near-term price appreciation. Given EQR’s recent sell-off (and competitor downgrades), we believe the stock has the highest risk as well as the highest reward among the peers.

SMBCNIKKO Update: Frontier Real Estate (8964) Sold Joyfultown in FP6/16; to acquire additional interest in Shin Misato Rating: 2-Neutral Target price: Y605,000 Published: 15-Aug-16 Hiroshi Torii

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Frontier Real Estate (8964)

Sold Joyfultown in FP6/16; to acquire additional interest in Shin Misato 

Rating: 2-Neutral Target price: Y605,000

Published: 15-Aug-16
Hiroshi Torii

CICC UPDATE - Speculation of Merger Activities in the Real Estate Industry in China

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CHINA’S A-SHARES: ended mixed by market close, after the shcomp closed above its 200-day moving average for the first time in a year yesterday. The market sentiment was largely lifted by speculation of merger activities in the real estate industry and central bank stimulus will increase. However, Banks led the index lower after accumulated huge gains in the past few trading days, while on the other hand small caps were relatively resilient after the regulator signals a long-delayed exchange link will start in 2016. Given China’s economy isn’t going to pick up soon and traditional sectors are in the doldrums, further consolidation may last for the short term, and those sectors with solid earnings are likely to outperform.

FBR UPDATE - Banks & Commercial Real Estate: Who Is Concentrated, What Regulators Care About, and Which Banks We Like

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Bank CRE concentration has come into focus, as cap rates have fallen to very low levels, regulators have sounded alarm, CMBS issuance is in decline, and certain banks have had to slow growth and/or raise capital to manage CRE concentration. The valuation of CRE concentrated banks reflects a heightened sense of risk. The silver lining is that the CMBS market is a weaker competitor for banks, and banks with sufficient risk management may benefit from reduced competition, wider spreads, and better underwriting. Of the CRE concentrated banks, our favorites include

  • ConnectOne Bancorp (CNOB – Outperform)
  • Customers Bancorp (CUBI – Outperform)
  • First Foundation (FFWM – Outperform)
  • Signature Bank (SBNY –Outperform)

 

Industrial & Infrastructure Fund Investment (3249 JP) (Buy) 16/6: DPU maintained, REIT intends to lift it higher

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Profit recovers, deadline disclosed for solving Shinonome problem

Regarding IIF Shinonome R&D Center, where the sole tenant is scheduled to depart at the end of September, the REIT (IIFI) appears to be in negotiations with a specific candidate tenant to keep the asset as a single-tenant property. However, consideration of selling the property is also under way in case agreement is not reached in negotiations. The REIT plans to determine course in September and have either a leasing agreement or sale contract signed by the end of 2016. IIFI's 16/12 guidance appears to assume the property remains vacant. Elsewhere, contracts have been signed to bring occupancy at the IIF Shinagawa IT Solutions Center to 100%, up from 76.1% at present. Moreover, expansion of IIF Nishinomiya Logistics Center will begin contributing to earnings from 16/12. Since the tenant at Shinonome decided to depart, the REIT has acquired five properties (excluding ownership increases). The high speed of investment has allowed the DPU level to be maintained and the REIT seems determined to improve DPU further. Currently about 20 properties (¥90bn) are being closely examined. That said, LTV has risen to 53%. The focus is therefore on not only the Shinonome outcome, but also capital-raising in combination with additional investment. We use a fair-value dividend yield of 3.0% and fair-value cap rate of 3.75% to calculate our target price. In February we changed to valuing IIFI using discount rates 25bp lower (previously 50bp lower) than respective weighted averages for the 38 REITs we cover. Given the clear deadline for dealing with Shinonome, the stable DPU, the commitment to improving DPU, and the high probability thereof, we return to valuing IIFI at discount rates 50bp lower than the 38-REIT averages.

NOMURA - Frontier Real Estate Investment (8964 JP) (Neutral) 16/6: issues resolved, but retail environment in flux

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Continuing to renegotiate rents with general merchandisers, seek tenants for urban retail spots

In 16/6 Frontier Investment posted a loss of ¥470mn on the sale of Joyfutown Okayama, where the main tenant was Ito-Yokado. However, the REIT drew down ¥340mn in internal reserves and paid the same DPU as 15/12 (¥9,694). The Sport Club Renaissance Hiroshima property was vacated in July 2016, but vacancy has been avoided as a contract was signed with new tenant Kohnan Shoji [7516]. Frontier has been steadily resolving issues on the property management side, but has yet to reach agreement on rent renegotiation for Ito-Yokado Higashi Yamato. Looking further ahead, in October 2017 the Tsutaya Book Store Tenjin (Fukuoka) will lose its whole-building tenant and in the same month rent renegotiation time will arrive for Aeon Shinagawa Seaside. We are also focused on these outcomes. On the other hand, the REIT acquired a 50% stake in Mitsui Shopping Park LaLaport Shin-Misato in August for ¥15.1bn (appraisal NOI yield of 5.0%).We estimate the LTV ratio is currently 41.9%, leaving acquisition capacity of ¥12bn up to an LTV ratio of 45%. This likely puts the focus on what method will be used to fund additional investment. We use a target dividend yield of 3.25% and target cap rate of 4.0% to calculate our target price, continuing to value the REIT using discount rates that are around 25bp lower than the respective weighted averages for 38 REITs under our coverage.

NOMURA - Nippon Building Fund (8951 JP) (Neutral) 16/6 results

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Occupancy higher than projected but unlikely to rise further, making rent revisions even more crucial

Guidance calls for real estate rental revenues to rise ¥0.78bn (2.4%) between 16/6 and 16/12, breaking down as ¥0.44bn from acquired properties and ¥0.34bn from existing properties. For the latter, the REIT has raised its average occupancy projection for 16/12 from 97.8% to 98.2% to reflect generally better-than-expected progress in attracting new tenants together with the full-term impact of new tenancies at NBF Toyosu Canal Front and Celestine Shiba Mitsui Building. Rent revisions involving existing tenants are also likely to remain positive, having turned so in 15/12 for the first time since 09/6. Meanwhile, the REIT has acquired four properties for a total of ¥29.5bn since 16/6, including the Ueno East Tower and the Toyocho Center Building, while at the same posting gains of ¥0.95bn on the sale of the NBF Sendai Honcho Building and the NBF Atsugi Building. We estimate the current LTV at 41.9%, giving the REIT ¥78bn to spend on properties before it hits its self-imposed ceiling of 46%. We use a fair-value dividend yield of 2.75% and fair-value cap rate of 3.5% to calculate our target price. We continue to value the REIT using discount rates that are 75bp lower than the weighted averages for the 38 REITs under our coverage.

FOLLOW ON - Hospitality Properties Trust (HPT | NASDAQ)

Hospitality Properties Trust
(HPT | NASDAQ)
 
~ Hospitality Properties Trust is a REIT that buys, owns, and leases hotels throughout the United States ~
 
Transaction Details:
Hospitality Properties Trust (HPT | NASDAQ)
11,000,000 Common Share Add-On Offering (100% Primary)
Greenshoe (15%): 1,650,000 Common Shares (100% Primary)
 
Re-Offer Range: $30.35 - $31.30
Last Sale (8/15/16): $31.90
 
Expected Pricing: Tuesday, August 16th, 2016 (Pre-Open; Subject to Acceleration)
 
Joint-Bookrunners:  Citigroup, BofA Merrill Lynch, Morgan Stanley
Co-Managers: TBC
 
Marketing Details: Monday, August 15th