Office REIT Sector Update And 6 Raymond James 'Outperform' Picks
On Friday, Raymond James & Associates (RJA) analyst William Crow and his team published a detailed report on office REITs, including updated earnings estimates, target prices and NAVs for the REITs in its coverage universe.
No REITs were rated either SB1 (Strong Buy) or MU4 (Underperform) or Sell. Three REITs were maintained at MP3 (Market Perform) or Hold; and the six REITS below were maintained at MO2 (Outperform), or Buy:
- Armada Hoffler Properties Inc (NYSE: AHH): $418 million cap, 6.5 percent yield
- Biomed Realty Trust Inc (NYSE: BMR): $4.2 billion cap, 5.1 percent yield
- Corporate Office Properties Trust (NYSE: OFC): $2.5 billion cap, 4.3 percent yield
- Douglas Emmett, Inc. (NYSE: DEI): $5 billion cap, 2.9 percent yield
- Easterly Government Properties Inc (NYSE: DEA): $624 million cap, 5.3 percent yield
- Parkway Properties Inc (NYSE: PKY): $2 billion cap, 4.4 percent yield
An Outperform rating for REIT securities indicates that RJA is "comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months."
Tale Of The Tape: 2015 YTD
RJA's REIT Sector Valuations
Crow noted, "Relative to other REIT sectors, office REITs appear fairly to fully valued on a multiple basis, but we remain attracted to the NAV discount given the early stage recovery of the sector."
The RJA report also mentioned that six months ago the office REIT sector was trading close to parity with NAV.
RJA Remains Bullish On Office REITs
- Positive View: RJA is maintaining an Overweight recommendation on the office sector, "which remains earlier in its cycle than many other real estate sectors."
- Rationale: "The office sector appears to be nearing the end of what has been a longer-term densification trend, and should benefit from steady, if not robust job growth, as well as from better clarity and an improved outlook for a couple of important office markets – Houston and Washington, D.C."
RJA–Armada Hoffler: Outperform, $12PT Unchanged
- The RJA target price represents a potential 14.5 percent upside from the June 4 AHH close of $10.48 per share.
- The AHH $12 PT represents 15x RJA's estimated 2016 AFFO per share.
- AHH shares are currently trading at approximately 20 percent discount to the $13.12 consensus NAV estimate.
In addition to office, the AHH portfolio also includes both shopping center and multifamily assets.
RJA–Biomed Realty: Outperform, PT Lowered $1.00 To $23.50
- The RJA new price target represents a potential 16.1 percent upside from the June 4 BMR close of $20.24 per share.
- The BMR $23.50 PT is derived by 17.2x RJA's estimated 2016 AFFO per share.
- BMR shares are currently trading at approximately 14 percent discount to RJA's revised NAV estimate of $23.61 per share.
Crow noted that recent second-generation lab space required a capex outlay of $190/square foot for TI build-out.
RJA–Corporate Office Properties: Outperform, PT Lowered $2.50 To $30.50
- The RJA new price target represents a potential 19.6 percent upside from the June 4 OFC close of $25.50 per share.
- The OFC $30.50 PT is derived by 19.2x RJA's estimate 2016 AFFO per share.
- OFC shares are currently trading at approximately 20 percent discount to RJA's revised NAV estimate of $31.76 per share.
"Defense spending headwinds appear largely over at this point." However, RJA noted, "Little doubt that riots/crime in Baltimore have raised near-term headline risk for Corporate Office Properties."
RJA–Douglas Emmett: Outperform, $33 PT Unchanged
- The RJA price target represents a potential 15.3 percent upside from the June 4 DEI close of $28.61 per share.
- The DEI $33 PT is derived by approximately 25x RJA's estimate of 2016 AFFO per share, (still lower than Hudson Properties 38.8x and Kilroy Realty approximate 30.7x).
- DEI share are currently trading at approximately 4 percent discount to RJA's revised NAV estimate of $29.82 per share.
Notably, DEI's Warner Center office complex occupancy still struggles at 83.5 percent. Along with its office portfolio, DEI also owns multifamily units in attractive Honolulu and Los Angeles locations.
RJA–Easterly Government Properties: Outperform, $17 PT
- The RJA price target represents a potential 8 percent upside from the June 4 DEA close of $15.73 per share.
- The DEA $17 PT is derived by 17x RJA's estimate of 2016 AFFO per share.
- The DEA shares are currently trading at approximately 9 percent discount to RJA's revised NAV estimate of $17.15 per share.
At the end of Q1 2015, DEA's office portfolio was 100 percent leased with an average remaining lease term of 7.4 years.
RJA–Parkway Properties: Outperform, PT Lowered $0.50 To $20.50
- The RJA price target represents a potential 19.3 percent upside from the June 4 PKY close of $17.18 per share.
- The PKY $20.50 PT is derived by 22.3x RJA's estimate of 2016 FAD per share.
- The PKY shares are currently trading at approximately 4 percent discount to RJA's revised NAV estimate of $17.92 per share.
Crow noted, "Near term, it seems unlikely that rental rates in the market will see much, if any, growth."
Wall Street investment bank ratings have potential to be confusing for investors, because firms utilize different classifications and definitions when it comes to Buy, Hold and Sell recommendations.
Latest Ratings for AHH
|Oct 2016||DA Davidson||Initiates Coverage On||Buy|
|Aug 2016||Stifel Nicolaus||Maintains||Buy|
|Jan 2015||Stifel Nicolaus||Maintains||Buy|
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