Building Growth

February 24, 2014 at 07:00 PM

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Mitch Germain
JMP Securities
212-906-3546
[email protected]

Chambers Street Properties (CSG) reported an active Q3, which saw a spike in leasing volumes, measures to strengthen the balance sheet and an increased outlook for 2013…We suspect the guidance raise, which resulted in a two-cent increase on the midpoint, was attributed to accelerating leasing activity following a 50 basis point (bps) expansion to the portfolio leased percentage.

Improving economic and liquidity conditions in Europe should help eliminate concerns on exposures (10% of portfolio). We prefer management to take a more aggressive stance on growth, as the company's peers have been able to source attractive investments without sacrificing yield (7%-plus).

Core funds from operations (FFO) per share were $0.17, in line with JMP/consensus, despite a net operating income (NOI) decline from some recent move-outs. CSG closed $60 million of deals in Q3, including a warehouse in Spartanburg, S.C., which complements CSG's existing inventory in that region, and a Dallas office campus, fully leased to a subsidiary of Humana. Acquisitions year to date stand at $240 million…

The 131-property portfolio was 96% leased at quarter end, up from 95.5% last quarter, as consolidated operating portfolio posted 143,000 square feet of positive net absorption resulting in a 70 bps increase to the leased rate.

Todd M. Thomas, CFA
KeyBank Capital Markets Inc.
917-368-2286
[email protected]

[On Jan. 6] DDR Corp. (DDR) provided initial 2014 FFO guidance that was 1% below consensus at the midpoint. We view the seemingly lackluster forecast to be roughly in line with expectations. Importantly, and based on the company's established track record over the last several years, we suspect that management's initial 2014 guidance may prove to be a conservative, though realistic, starting point for the year.

The probability that the company's actual results in 2014 will be at or above the high end of the forecasted ranges for FFO per share and same-store net operating income (SSNOI) growth outweighs the probability that results will fall at the midpoint or below, in our view. Importantly, steady execution throughout the year should lead to a narrowing of the stock's valuation gap relative to its peers.

DDR trades at a 22% 2014 adjusted FFO multiple discount relative to the sector and shares trade at a 7.1% implied cap rate, which is 80 bps higher than the sector's average implied cap rate and 90 bps higher than the REITs' weighted average implied cap rate. We reiterate our Buy rating.

Management issued initial 2014 FFO guidance of $1.17-$1.21 per share. Key assumptions to management's full-year forecast include: same-store NOI growth of 2.5%-3.5%; an increase in the year-end core portfolio leased rate by 75 bps, resulting in a leased rate of nearly 96%; acquisitions of prime shopping centers of $250 million; dispositions of $200 million of non-prime shopping centers and $30 million of non-income-producing assets; and general and administrative expense of approximately 5% of total revenues.

First, we suspect that the company will source in excess of $250 million of new investments in 2014. Based on current market conditions, acquisitions funded with debt and equity and current costs will likely be accretive on an earnings basis.

Second, leasing momentum is steady, and we would not be surprised to see DDR's year-end core portfolio leased rate increase by more than 75 bps (though some of the increase may result from the sale of properties with below average occupancy). Meanwhile, reimbursement ratios may rise more than expected as economic occupancy rates rise, which could increase NOI margins more than expected.

Steady cash flow growth in 2013 leads to a 15% dividend bump to start the year. In conjunction with yesterday's guidance release, DDR announced a 15% dividend increase that equates to an annualized distribution of $0.62/share. The new dividend rate equates to a 4% annualized yield, which compares to the REIT weighted average dividend yield of 3.8%. DDR's 2014 adjusted FFO payout ratio remains below average at 59%, which compares to 69% for the REIT weighted average, implying that there remains additional dividend upside throughout 2014.

Nathan Isbee
Stifel, Nicolaus & Company
443-224-1346
[email protected]

General Growth Properties' (GGP) high productivity mall portfolio is generating strong growth as permanent occupancy increases and the REIT drives rents. GGP should continue to generate above-average growth for the foreseeable future given healthy tenant demand and limited supply of high quality mall space.

While the retail world is evolving, and apparel e-commerce is growing, GGP's malls will play an important part in most retailer's omni-channel strategies, in our view. In addition, GGP is strengthening its portfolio through a $2.1 billion development/redevelopment pipeline and strategic acquisitions of high growth street retail assets. We maintain our Buy rating and $23 target price based on a slight discount to our $24 NAV estimate at a 5.5% cap rate.

Same-store NOI increased a strong 6.2% in Q4 and 6.0% in 2013, at the high-end of GGP's 5%-6% full-year guidance. Same-store NOI benefited from occupancy increases and temp to perm conversions in 2013.

While same-store NOI growth will moderate in 2014, we project GGP will generate above average 4%-5% growth. Tenant sales increased 3.6% to $564 per square foot for the trailing 12-months. While sales growth decelerated from 3.8% growth in Q3, it appears that sales were relatively stable in Q4.

James Sullivan
Cowen and Company
646-562-1380
[email protected]

Kimco Realty (KIM) reported Q4'13 FFO per share of $0.33 which was in line with our and the Street's estimate. Management maintained its 2014 FFO per share guide of $1.38. Operating trends were very favorable. We maintain our Outperform rating on Kimco.

Kimco maintained its 2014 FFO per share guidance range of $1.36-$1.40. The $1.38 midpoint is in line with our estimate and $0.01 below the Street's $1.39. The guide assumes SSNOI growth in the range of 2.5%-3.5%, which compares with our 2014 assumption of 3.6%. The 4.1% SSNOI increase in Q4 provides very positive momentum going into 2014.

Moreover, occupancy increased consistently across the portfolio in the fourth quarter and the additional increase expected in 2014 implies an improving pricing environment. The guide does not provide for acquisitions and dispositions. For 2014, we assume Kimco will be a net acquirer and that acquisitions and dispositions will offset each other.

Kimco reported cash SSNOI growth of 4.1% in Q4. Operating results were strong with occupancy up 60 bps from Q4'12. Anchor occupancy was 97.9%, a 30 bps increase over the prior year and small shop occupancy increased 100 bps over the same period. Leasing spreads were a healthy 5.9% for Q4.

R.J. Milligan
Raymond James & Associates
800-248-8863

Kimco signed 618 leases totaling 2.3 million square feet during the quarter, which was 20% higher than Q4'12, highlighting continued demand from retailers for space, despite a disappointing holiday season. Same-store rent spreads on new leases and renewals were up 5.9% in the U.S., which was comprised of +8.2% on new leases and +5.2% on renewal leases.

We note tenant improvements (TI) were $23.23 per square foot, a reduction from Q3′s average of $26.95, though still elevated from the mid-to-high teens we saw in 2011 and early 2012 (86 non-comparable leases had average TIs of $35.47 per square foot).

During the fourth quarter, Kimco purchased 14 shopping centers in the U.S. for $247.5 million. For the year, Kimco acquired 24 properties (including six properties from existing joint ventures) for approximately $675 million.

On the dispositions side, during Q4, Kimco also sold ownership interests in 14 properties (eight wholly owned and six unconsolidated joint ventures) for $192 million with Kimco's share of proceeds at $93.6 million. For the year, Kimco sold 35 properties (23 wholly owned and 12 unconsolidated) for about $350 million with Kimco's share of proceeds at about $180 million.

We expect Kimco to continue to cherry-pick higher quality joint-venture assets at attractive pricing; to that end, the company purchased the remaining 89% interest in three joint venture properties subsequent to the quarter's end.

John Roberts
Hilliard Lyons
[email protected]
502-588-1165

LTC Properties Inc. (LTC) management retained its per share FFO guidance for 2013 at $2.35 to $2.37 a share in spite of all of the recent investments. We are now in the middle of that range, as we are adding $1.2 million to our G&A numbers to account for a reserve on its recent $141 million debt investment. We are fine-tuning our 2014 FFO estimate up three cents to $2.69 a share.

Management has locked in some very attractive debt and raised capital at a highly opportune time, leaving it in an excellent position to take advantage of acquisitions as they come along.

We continue to really like LTC's advantages over its larger peers due to the fundamental ability of small targeted higher-yield transactions to really impact the bottom line of the company.

These are transactions where there is much less competition, as they barely move the needle for the larger companies. The transactions closed already in the current quarter are highly illustrative of such a transaction.

The recent debt acquisitions are highly attractive in the current environment, locking in some very attractive returns.

We are retaining our expectation for total acquisitions for 2014 at just under $100 million. For the full year, that means FFO of $2.36 in 2013 and our 2014 estimate at $2.69 a share, although that number will be very conservative should the company undertake a level of investments similar to [2013].

R.J. Milligan
Raymond James & Associates
800-248-8863

We are maintaining our Outperform rating on National Retail Properties Inc. (NNN). We continue to be cautious of net-lease names given their longer-term leases and historical underperformance as rates move higher, though are less concerned that spiking interest rates will pose a major headwind in the short term. We believe National's disciplined strategy of focusing on off-market acquisitions (higher cap rates) and access to cheap capital will continue to drive earnings growth.

National has yet to participate in the significant M&A activity we have seen in the net-lease space over the past year and instead has remained disciplined in their acquisition strategy, which we believe will create value for its shareholders over the long-term.

National remains focused on the retail space (vs. branching out into office, industrial, distribution), pursuing non-rated or below investment grade tenants whose leases include rent bumps (vs. flat investment grade leases) and attractive going-in yields, and continues to underwrite real estate (vs. financially driven transactions that may be accretive to earnings, but are being purchased at significant premiums to NAV).

We are increasing our 2013 FFO per share estimate to $1.91 from $1.90, previously to reflect the 3Q beat. We are maintaining our 2014 and 2015 FFO per share estimates of $2.03 and $2.13, respectively.

Simon Yarmak, CFA
Stifel, Nicolaus & Company Inc.
443-224-1345
[email protected]

NNN's deal pipeline remains robust, and the company continues to maximize its low cost of capital…2014 acquisition guidance is $300 million at a low 7.0% yield. The pipeline is more back-end loaded.

NNN also tries to maintain a medium-sized enterprise to maximize per-share growth over the coming years… We think NNN is able to do this thanks to its successful long-term track record, which has resulted in excellent capital access and a very low cost of debt.

In the third quarter, NNN acquired 35 properties for $90 million at a 7.7% cap rate. Contractual rental increases could results in 9.0% yields. Year to date, the company has purchased $570 million at a 7.9% cap rate with annual bumps of 1.5% to 2.0%.

Paul E. Adornato, CFA
BMO Capital Markets Corp.
212-885-4170
[email protected]

We remain positive on W. P. Carey's (WPC) business model and growth potential, as the company nears the closing of its $4 billion acquisition of its non-traded REIT, Corporate Property Associates 16. We like WPC's asset management arm, as it provides a fairly unique platform through which the company can fund external growth with individual investors' equity while boosting earnings through several fee streams.

A key consideration is that WPC is self-advised, and the asset management business benefits WPC shareholders, not an external advisor.

We think that as REIT-dedicated investors continue to sharpen their pencils on the emerging net lease sector, WPC's track record, consistency, and differentiated business will compare favorably to peers.

Subsequent to the Q3, WPC closed on about $512 million of investments, including $409 million on behalf of the non-traded REITs (our prior estimate assumed Q4 acquisitions of $300 million.). We believe increased institutional exposure could create incremental demand for the stock. At current levels WPC trades at 13.7 times 2014 AFFO, a 26% discount to the REIT universe average of 18.4 times. Our $74 target assumes a 16.6 times 2014 AFFO multiple, still a 10% discount to REIT universe. The stock provides a current 5.7% yield (rising to $3.52 or 5.8% following the CPA:16 merger) that's well above the REIT average.

Daniel P. Donlan
Ladenburg Thalman
212-409-2056
[email protected]

Updating our model for W. P. Carey's pending merger with non-traded REIT CPA:16, we see several reasons for WPC's multiple to expand relative to its net lease peers and the average REIT

From an earnings-quality standpoint, we see WPC generating just 6%- 7% of its future AFFO per share from the investment management business vs. its prior average of 10%-15% since the closing of the CPA:15 merger in Sept. 2012.

Given that investors tend to assign greater value to rents vs. fee streams, this should result in a better multiple for the REIT, in our view.

Similarly, the gap between the REIT's FFO per share and AFFO per share should narrow substantially…From a size and liquidity perspective, WPC's market cap should increase to over $6 billion from $4 billion today, while the REIT's float should grow 50% to about 88 million shares from its current 58 million—both of which could result in increased interest from institutional investors.

Lastly, from a modeling standpoint, we expect WPC's future disclosure to be much cleaner going forward as the REIT's current 18.5% ownership in CPA:16 adds undue complexity to the consolidated financials.

As such, we believe investors that have chosen to ignore the name because of its complexity could begin to warm-up to the story in the coming months. We reiterate our Buy rating.

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