Jefferies 2015 Outlook On Shopping Center REITs

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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

Related Link: Retail REIT DDR Corp Hits 52-Week High On Dividend Hike FFO Guidance

The Good News

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.

Related Link: Brixmor Property Group Secondary Offering -- Already Baked Into The Cake?

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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.

Related Link: Jefferies Debuts 'Lucky 7' Top REIT Picks For 2015

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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Posted In: Analyst ColorREITPrice TargetReiterationTop StoriesAnalyst RatingsGeneralReal Estate10-year Treasury noteGreat RecessionJefferiesOmotayo Okusanya
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