Retail Properties Of America's Strategic Repositioning May Be Paying Off, KeyBanc Says

In spite of its exposure to the struggling retail landscape, including bankrupt Toys "R" Us, Retail Properties of America Inc RPAI’s same-store net operating income has grown 1.7 percent year-to-date.

Some on the Street see an iopening for profits.

The Rating

KeyBanc Capital Markets analyst Todd Thomas upgraded RPAI to Overweight and set a $16 price target in a Monday note. 

The Thesis

Retail Properties is completing the divestiture of 150 property assets to sharpen its focus in 10 markets, Thomas said. (See Thomas' track record here.) 

The firm has already closed about $720 million in sales this year and intends to complete another $380 million, which could boost annual funds from operations.

“After nearly five years of FFO headwinds from disposition activity and deleveraging, we expect FFO growth to accelerate in 2018, and the cadence of growth should improve going forward,” Thomas said. 

KeyBanc expects fourth-quarter SSNOI growth above the previous quarter’s 1 percent as the firm reassigns real estate vacated by Sports Authority, hhgregg, Inc. and Golfsmith International Holdings, Inc. The intended sale of Chicago’s Schaumburg Towers will also eliminate an annual $8 million expense, according to KeyBanc. 

In the analyst's estimation, the growth and portfolio repositioning merit a higher multiple than what the present valuation of Retail Properties reflects.

Price Action

Retail Properties’ stock spiked 1.5 percent on the upgrade. At the time of publication, shares were trading at $13.27.

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Photo courtesy of RPAI.