SunTrust, CBRE Bullish On Industrial Real Estate Through 2017
On Thursday, SunTrust Robinson Humphrey analyst Ki Bin Kim published a research note on prospects for the U.S. industrial REIT sector, based on information gleaned from discussions with CBRE Group Inc (NYSE: CBG) industry experts.
CBRE was bullish overall on the business environment for industrial REITs for the next two to three years.
In conjunction with this discussion, Kim also noted four REITs that were trading significantly below SunTrust net asset value (NAV) estimates:
- Prologis Inc (NYSE: PLD): 17.6 percent lower
- First Industrial Realty Trust, Inc. (NYSE: FR): 11.5 percent lower
- Duke Realty Corp (NYSE: DRE): 16 percent lower
- DCT Industrial Trust Inc (NYSE: DCT): 7 percent lower
Tale Of The Tape: 2015 YTD
The MSCI REIT Index (RMZ) is a good proxy for the broader equity REIT sector.
SunTrust–CBRE Key Takeaways
- 1. Bullish Fundamentals: CBRE forecasts a 6 percent increase for industrial REITs rents "for at least two years."
- 2. Supply/Demand: A favorable demand relative to supply dynamic in play at least through 2017.
The CBRE data indicated that the four-year period from 2010 to 2014 saw positive industrial net absorption. Notably, CBRE expects this trend to continue for four more years.
- 3. Light Industrial: CBRE sees demand from e-commerce and omnichannel retail, same-day delivery as a catalyst for small infill industrial demand, along with the housing rebound (contractor demand) and a lack of new supply.
- 4. Cap Rate Compression: Industrial property cap rates could continue to "drift lower" (helping to boost NAVs), "given the amount of capital seeking a home in real estate."
- 5. Panama Canal: CBRE does not expect the widening of the Panama Canal to create a major change in the dynamics between east coast and west coast ports.
Los Angeles/San Francisco - seeing low 4s, with other gateway markets/hubs seeing low 5s. Class A assets are trading at cap rates ~100 bps below Class B assets, on average.
Notably, Houston logistics demand remains healthy, with "Class A cap rates in the 5 to 5.5 percent range, still in top seven in the country."
SunTrust–Prologis: Buy Rating, $50 PT
The SunTrust $50 target price represent a ~28.8 percent potential upside from the PLD previous close of $38.06 per share.
SunTrust–First Industrial Realty: Buy Rating, $25 PT
The SunTrust $25 target price represents a ~27.7 percent potential upside from the FR previous close of $19.57 per share.
SunTrust–Duke Realty: Neutral Rating, $23 PT
The SunTrust $23 target price represents a ~20.7 percent potential upside from the DRE previous close of $19.06 per share.
SunTrust–DCT Industrial: Neutral Rating, $37 PT
The SunTrust $37 target price represents a ~ percent potential upside from the DCT previous close of $33.02 per share.
Kim noted, "In addition, these companies have sophisticated operating and development platforms that should garner some type of premium over pure real estate values. Public equity markets are clearly pricing in significant oversupply risk or cap rate expansion, and in our view, it is overly baked into the stock prices at this point."
In addition to the price appreciation, long-term investors will receive the benefit of dividend income from these industrial REITs, which in turn will boost the expected 12-month total returns even higher.
However, on Thursday, the 10-year Treasury yield increased 3 bps to 2.4 percent, contributing to a ~1 percent dip in the Vanguard REIT Index Fund (NYSE: VNQ), which tracks the MSCI REIT Index (RMZ).
The maxim "don't fight the Fed" certainly remains a valid mantra for investors, especially if 10-Year Treasury rates were to rise significantly beyond 2.5 percent.
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