Although Jefferies is positive regarding the REIT sector in general for 2015, it is less optimistic regarding the performance of community and grocery-anchored shopping centers.
REIT analyst Omotayo Okusanya ostensibly maintains a neutral stance on the shopping center REIT sector for 2015.
Jefferies REIT coverage for this sector is limited to:
- Federal Realty Investment Trust FRT
- Regency Centers Corp REG
- DDR Corp DDR
The Good News
On one hand, Jefferies acknowledges that new supply has been limited post the Great Recession.
This will be a driver for higher lease rates in 2015 on vacant space and renewals.
The Other News
On the other hand, valuations have increased to the point where they are above historical averages for this REIT sector.
The outstanding performance of neighborhood and community center landlords during 2014 has resulted in price to FFO multiple expansion far beyond the range of historical averages.
Relative Net Asset Values (NAVs)
Another REIT valuation metric is the value of the underlying portfolio of assets compared to the valuation of the company.
There are many reasons why a REIT might trade above NAV and still be considered "fairly valued," including: strength of balance sheet, quality of REIT management, development and acquisition pipelines, barriers to competition restricting new supply, below market leases and embedded contractual rent increases.
However, it is notable that shopping centers are trading at over 8 percent above their five- and 10-year NAV averages.
Tale Of The Tape -- 2014
Returns such as these are not sustainable moving forward in 2015, for the reasons stated above.
However, that has not stopped Mr. Market from continuing to bid these REIT shares higher. During the first two weeks of 2015 trading, these REITs have already gained significantly. Here are the figures as of January 14:
- Federal Realty Trust - up 5.49 percent year-to-date, current yield approximately 2.5 percent
- DDR - up 4.89 percent year-to-date, current yield approximately 3.6 percent
- Regency Centers - up 4.3 percent year-to-date, current yield approximately 2.8 percent
The decline in the 10-Year Treasury Note yield, at times below 1.9 percent, has no doubt contributed to the rise in these shares since the beginning of the year.
1 Buy Rating
Jefferies maintained its Buy rating on DDR, its top shopping center pick. DDR's main focus is power centers, which are typically anchored by big box stores. Jefferies noted that although 4 percent of DDR's annualized base rent (ABR) is derived from Barnes &Noble, Inc., Office Depot Inc, Staples, Inc. and Sears Holdings Corp; the company felt confident that if necessary, it could replace these tenants at a higher rent per SF.
The price target (PT) was raised from $21 to $22, representing an 11.3 percent upside to close of $19.52.
2 Hold Ratings
Jefferies maintained its Hold rating on Federal Realty Trust, citing valuation concerns. FRT is trading at approximately 27.7x one year forward FFO, a significant premium to industry peers, which already reflects its high quality portfolio and development pipeline opportunities.
PT was raised from $129 to $141, which represents a slight decrease from its close of $143.11.
Jefferies maintained it Hold rating on Regency Centers, citing valuation concerns, despite giving management credit for enhancing the portfolio in terms of quality, location, grocer sales, demographics and merchandising mix over the past few years. Jefferies noted that REG is trading at approximately 23.5x FFO vs. a five-year average of approximately 17.6x FFO.
PT was raised significantly from $47 to $61 (due to a potential conflict, Jefferies had not published revised notes on Regency for about six months). However, the new PT is still $8.13 below REG closing price of $69.13, a significant decrease given the Hold rating.
Image credit: willowbrookhotels, Flickr
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