The Market Isn't Fully Appreciating Spirit Realty's Recent Progress

Morgan Stanley believes Spirit Reality Capital, Inc (New) SRC is not getting the attention from the market on its recent progress, pointing out the potential for valuation.

The brokerage thinks the stock suffered in the last one-year period blaming negative sentiments on some tenant issues and ambiguous tactics apart from the top management changes.

However, analysts led by Vikram Malhotra see most of the issues as settled now and that favorable times are ahead. Therefore, Morgan Stanley has upgraded the stock from Equal Weight to Overweight and boosted the price tag from $11 to $15. The company's EPS provided a 4.8 percent positive surprise in the last four quarters.

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"As the rationale for negative sentiment fades, we expect investors to refocus on the significant progress the company has made over the last two years. The company's Shopko tenant concentration has essentially halved from early 2014, down to 8 percent from 14 percent, through accretive asset recycling. At the same time, the company has brought down its leverage to 6x from close to 8x and achieved an investment grade rating earlier this year," the lead analyst said in a research note.

The brokerage expects Spirit Realty Capital to adopt an acquisition strategy to lift its growth pace compared to its recent trends of below average. The company did well to extinguish high coupon debt of about $500 million to this point. Another $500 million is expected to mature before the next year ends.

At time of writing, Spirit Realty Capital was up 1.8 percent at $13.85.

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