Baird Initiates Coverage On REIT Sector, Gives Top Picks

On March 23, Baird Equity Research initiated coverage on eight shopping center REITs with a Market Weight recommendation for this sub-sector, and selected four top performers. Baird noted that despite strong fundamentals and low cap rates, "the bulk of the upside is priced in to most of the larger-cap shopping center names."
Baird - Large Cap Coverage
  • DDR Corp DDR $6.8 billion cap, 3.7 percent yield - Outperform, $22 PT.
  • Kimco Realty Corp KIM $11.3 billion cap, 3.5 percent yield - Neutral, $27 PT.
  • Regency Centers Corp REG $6.5 billion cap, 2.8 percent yield - Neutral, $66 PT.
Notably, Baird's price targets for Kimco and Regency represented a downside of 2.4 percent and 5.2 percent, respectively, when the research note was published.
Baird - Small/Mid-Cap Coverage
  • Cedar Realty Trust Inc CDR $647 million cap, 2.6 percent yield - Neutral, $8 PT.
  • Excel Trust Inc EXL $901 million cap, 5 percent yield - Outperform, $15 PT.
  • Kite Realty Group Trust KRG $2.4 billion cap, 3.6 percent yield - Outperform, $32 PT.
  • Retail Opportunity Investments Corp ROIC $1.7 billion cap, 3.7 percent yield - Outperform, $20 PT.
  • Ramco-Gershenson Property Trust RPT $1.5 billion cap, 4.3 percent yield - Neutral, $20 PT.

Deeper Dive - Baird 4 Top Picks

Baird - DDR Corp: Outperform, $22 PT
DDR operates 415 shopping centers, totaling 118 million square feet, spread across 41 states and Puerto Rico.
  • Baird noted that the move to elevate CFO David Oates to CEO, removed uncertainty in the C-Suite, and signaled a refocus on creating NAV and reducing G&A.
  • Since 2010, DDR has increased its average property size to 300,000 SF, by selling off non-core assets.
  • DDR's focus on larger power centers in supply constrained markets should provide an upside from accretive redevelopment.
  • ABR has increased 15 percent since 2011; at 95 percent occupancy, "DDR should be able to continue to push rents." Baird's $22 PT implies a potential 15 percent upside from a $19.11 per share price.
Baird - Excel Trust: Outperform, $15 PT
Excel operates a portfolio of 40 properties containing 7.6 million SF of community/power centers and grocery-anchored neighborhood centers, spread across 12 states.
  • EXL has a lower percentage of small-shop space, 80 percent of revenues come from national and regional tenants, which helps to provide stability.
  • Baird noted Excel's strong management team, headed by CEO Gary Sabin, "a seasoned shopping center veteran" who has driven superior shareholder return in the past.
  • Excel is "one of the few shopping-center REITs recycling capital accretively – selling low-cap-rate non-core assets and recycling the proceeds into higher-cap-rate off-market opportunities."
Baird's $15 PT implies a potential 4.7 percent upside from a $14.33 per share price.
Baird - Kite Realty Group: Outperform, $32 PT
Kite owns interests in a portfolio of over 125 operating, development and redevelopment properties, consisting of neighborhood and community centers, totaling approximately 21 million total square feet, spread across 26 states.
  • Baird noted through its recent acquisitions, Kite has doubled the number of properties in its portfolio, significantly increased ABR, reduced properties under development, reduced leverage, and "is now investment-grade."
  • Baird noted that Kite recently merged with Inland Diversified, and believes "KRG's management will continue to mine value from the Inland portfolio, focusing on both redevelopment and re-tenanting."
  • Baird believes that Kite "will post above-average NOI growth over the next several years," while noting that "KRG shares still trade at one of the lowest multiples in the sector," and expects that gap to narrow over time.
Baird's $32 PT implies a potential 9.8 percent upside from a $29.13 per share price.
Baird - Retail Opportunity Investment Corp. (ROIC): Outperform, $20 PT
ROIC presently owns and operates 59 community and neighborhood shopping centers totaling ~6,900,000 square feet, with the entire portfolio located in: California, Oregon and Washington.
  • ROIC was able to source over $400 million of acquisitions in 2014 and is projected to complete another $300 million in 2015 in high barrier to entry California/West Coast markets.
  • Despite cap-rates below 5 percent in ROIC's high-demand target markets, Baird believes that CEO Stuart Tanz and the team he brought over from Pan-Pacific will be able to continue to source off-market deals.
  • Baird noted that the portfolio ROIC portfolio "is 97.6% leased and continues to generate above-average SSNOI growth."
Baird's $20 PT implies a potential 7.8 percent upside from an $18.55 per share price.

Posted In: Baird Equity ResearchDavid OatesGary SabinStuart TanzAnalyst ColorREITInitiationTop StoriesAnalyst RatingsTrading IdeasReal Estate