BMO Capital Markets Analyst Paul Adornato says one of the REIT stocks he recommends is Acadia Realty Trust (AKR). He says the company has a niche business in that it specializes in owning and developing urban retail properties.
“This is a property type that will enjoy above-average returns for the foreseeable future as a beneficiary of a very long-term trend of retailers looking to reduce their mall store fleet, at least in part, in order to build brand awareness and reach the consumer where they now like to live, and that is in dense urban markets,” Adornato says. “ While this is a focus for Acadia, very few other property owners play in this urban retail space. AKR’s management team has been at it for a long time, and they have fantastic tenant relationships.”
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Adornato says Acadia is well underway on a major development in downtown Brooklyn. He says they are just about to start leasing the small shop space, which, as in any retail development, could make or break the economics of the retail property.
“The anchors are already in place, and we think that given the real resurgence of urban neighborhoods including downtown Brooklyn, this space should go very, very well for Acadia,” Adornato says.
MLV & Co Analyst Richard Eckert says NorthStar Realty Finance Corp (NRF) is his top stock recommendation right now. He says it is almost more of an equity REIT at this point.
“Over 80% of Northstar’s income now comes from equity investments, from direct investments in real estate, and I don’t think the market recognizes that,” Eckert says. “They’re still being traded like a mortgage REIT, when in fact they’ve already been included in the RMZ, which is an equity REIT index.”
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Eckert says he has broken out an estimated NAV for each of the individual property portfolios, and when added up, the total is a lot more than what the they are trading at now. He says that makes the stock what he considers several undervalued portfolios with a near-term catalyst.
“The spinoff of Northstar’s internal manager last year, Northstar Asset Management (NSAM), created a lot of value. When I initiated on NorthStar — I think that was April 21, 2014 — it was trading for roughly $16 a share,” Eckert says. “A person owning NorthStar at $16 a share on that date now holds two securities that are worth nearly $40, NorthStar and NorthStar Asset Management.”
Janney Montgomery Scott Analyst Robert Stevenson says Mid-America Apartment Communities Inc (MAA) is his favorite name in the REIT space. He says they are one of the better Class B, B-plus apartment owners and operators in the Southeast Sun Belt markets to Texas.
“They have major concentrations in markets like Atlanta and Charlotte and Austin, an inexpensive valuation, and peer group average same-store NOI growth in 2015,” Stevenson says.
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Mid-America Apartment Communities continues to upgrade the quality of its portfolio via acquisitions as well as through dispositions, Stevenson says. He expects to see continued operating upside from the Colonial assets Mid-America acquired in 2013.
“All of that, especially at current valuation levels, makes it our favorite name in the space,” Stevenson says.
Global Net Lease, Inc. (GNL) CFO Patrick Goulding says the company has a conservative financing strategy and uses leverage where it’s prudent and accretive to earnings. He says the goal is maintain leverage below 50%.
“Our current leverage is below 40%, and what we are designing this to do is to have an investment-grade quality balance sheet, so maintaining leverage certainly below 50% but probably more in the mid-40% range,” Goulding says.
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Ultimately, Goulding says management’s intention is to go to the rating agencies and get a debt rating to enable them to access even more competitive borrowing in the public market. He says the company currently uses a combination of mortgage debt and a line of credit.
“It’s about 35% mortgage debt and 65% line of credit. Our debt is also really focused on the European portfolio because the rates at which we can put debt in place are much more attractive, particularly in the eurozone, but also, we get the benefit, if we use debt in euro or pounds, where we can use it to mitigate our foreign-exchange fluctuation,” Goulding says. “So we’re essentially using it for asset liability matching to enable us to mitigate the foreign-currency risk on both the euro- and pound-denominated investments. Essentially, our strategy at the end of the day is to be 100% hedged to those currency exposures.”
Alexander D. Goldfarb, Managing Director and Senior REIT Analyst in the research department of Sandler O’Neill + Partners, is currently recommending Spirit Realty Capital, Inc (SRC) even though the stock has recently been beaten up.
“Triple net may not be in vogue these days, but when you look at Spirit you are going to get 7% dividend yield, and you are getting 10%-ish earnings growth,” Goldfarb says. “That’s pretty compelling.”
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Despite concerns over interest rates, Goldfarb says investors are still getting 7% based on where Spirit’s stock is trading. He expects the company to post at least high-single, if not double-digit, earnings growth.
“And you have a company that continues to reduce its exposure to a major tenant, Shopko, which has weighed on the shares, so as they continue to reduce that, that should be a catalyst,” Goldfarb says.
Store Capital Corp (STOR) CEO Christopher Volk says his company’s stock is a growth stock that happens to be a REIT. He says the stock pays a nice dividend, but also has outsized growth potential as a result of the volume of acquisitions and the spreads the company has been realizing relative to its size.
“The biggest thing that’s driving our growth in cash flow, though, is new acquisitions,” Volk says.
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Store has been able to do new acquisitions at lease rates and borrowing spreads that are among the best in the company’s 35-year history of running net-lease companies, Volk says.
“By increasing our guidance from $850 million to $1 billion of acquisitions for 2015, a lot of that impact will not be felt in 2015 because these transactions will close at varying times during the year and won’t be outstanding for the full 12-month period, but they will definitely have a huge impact on 2016,” he says. “And the growth of our balance sheet is large enough to cause external growth like this to be material.”
Equity One, Inc. (EQY) CEO David Lukes says the company has made it a priority to focus on leasing. He says those efforts are beginning to pay off, and are apparent in first quarter results.
“There are a couple of interesting data points from our first quarter results that are good indicators of what’s happening in our business,” Lukes says. “Number one, the average days that a suite was vacant, and all of our leasing was quite large. What that means is we were able to lease stubborn inventory by focusing on tenant mix. Shopping centers are very much like a rolling ball. The hard labor is to get it moving; keeping it moving is a little easier.”
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Lukes says that a lot of the “heavy lifting” was completed last summer in getting a couple of big deals done and getting some centers moving and picking up steam. Those efforts, he says, resulted in higher occupancy and great leasing spreads.
“So one of the takeaways from first quarter is almost verifying that the business plan of leasing focus was the right one, and it’s paying off,” Lukes says. “The second is that we announced a couple of large redevelopment projects — two in Florida and one in California — that together are about $140 million in cost. Those are great opportunities for us to create shareholder value by investing back in our best assets.”
Rouse Properties Inc (RSE) CEO Andrew Silberfein says 85% of the company’s assets are what they call the “only-game-in-town” assets, meaning they are the only enclosed malls in their market. When the company purchases an asset, Silberfein says management is looking for a number of things.
“We like having the protection of being the only game in town, and we want to have the best real estate in the market with pricing power,” Silberfein says. “Generally, throughout our portfolio, our assets are the best-located real estate in the market. And what we’re looking for is an opportunity for us to apply our platform and improve the metrics of the asset.”
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Silberfein says Rouse is investing over $350 million in its portfolio to create a better shopping experience for the shoppers in communities where its malls are located. Sometimes, he says, that means improving the retailer mix, improving the quality of retailers or driving higher occupancy rates.
“A lot of this is about changing the character of the mall, and by that, I mean making it more relevant to the consumer, where we will add entertainment tenants, high-volume restaurants, everyday uses, large-format tenants, complemented by family-friendly community-based events, and they can get all of this under one roof,” Silberfein says. “So that’s what we’re doing, and what that does is it enables us to extend our trade area, and we have seen that people come and spend more time at the mall, and they come more frequently.”
Portfolio Manager Derek Warren of Morguard Financial Corporation says his firm focuses solely on real estate in North America. Brookfield Asset Management Inc (BAM) is a top holding as one of Canada’s largest real estate institutions that has over time shown exceptional growth.
“[Brookfield] has shown an ability on behalf of management to take advantage of situations as they occur across markets. From a long-term standpoint, you should be buying real estate when there is blood in the streets, and Brookfield has been able to wade into those troubled areas with capital and is able to pick quality real estate that is either from owners or financiers that are distressed,” Warren says.
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Warren points out that where Brookfield acquires it’s not the real estate that’s distressed; it’s the people who own it that are distressed. He says being able to take advantage of those situations is important.
“For example, the Brazilian economy right now is going through a turmoil, as I’m sure your press has been talking about with Madam President’s recent visit to the White House. But BAM is right now buying up Class A office buildings and shopping malls in Brazil, because over time, that is a trade that’s going to work out very well, and they are getting quality assets at distressed prices. So that’s why we like them,” Warren says.
Timothy Winter, Analyst Gabelli & Company, says SCANA Corporation (SCG) is in a peak construction period. Come 2017, when the company’s development costs decline, he says it will have free cash flow and significantly improved earnings power.
“SCANA, which is South Carolina Electric & Gas, is building two new nuclear units at their existing Summer Nuclear Station in Jenkinsville, South Carolina,” Winter says. “We consider this to be one of the better rate-based growth stories because South Carolina legislation and regulation allows them to earn a return of 11% ROE on nuclear development that they true up every year.”
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When SCANA’s two plants come on line, Winter says they will be highly valued as low-cost baseload power plants with a different fuel than gas. Since the U.S. can no longer build coal plans, he says the addition of high baseload nuclear plants is highly desirable.
“For instance, should gas prices rise significantly then these plants would become tremendously valuable,” Winter says. “Nonetheless, we have earnings growth associated with the development of two new nuclear plants that is being supported by the state via legislation and regulation. And again, that’s a high-quality utility with growing earnings and dividend.”
