Credit Suisse On Shopping Centers: 2 Downgrades & 2 Top REIT Picks
On May 26, Credit Suisse updated the REIT sector, including the malls and strip centers within its coverage universe.
Two REITs were downgraded by Credit Suisse from Neutral to Underperform:
- Macerich Company (NYSE: MAC) - $12.9 billion cap, 3.2 percent yield.
- Macerich is the third largest Class-A regional mall operator, with significant West Coast assets. Earlier in the year, MAC management rejected a takeover offer which valued MAC shares at $95.50.
- Regency Centers (NYSE: REG) - $6 billion cap, 3 percent yield.
- Regency has been a top performer among community and neighborhood shopping centers during the past yea; with center development historically being one of its strong suits.
Tale Of The Tape - Past Year
Credit Suisse does not see significant upside catalysts for shares of either of these retail landlords.
In both cases, Credit Suisse has a Top 5 Pick as a sector alternative, rated Outperform.
Credit Suisse - Community/Neighborhood Centers
DDR Corp. (NYSE: DDR) - $6.2 billion cap, 4 percent yield. Power center focused DDR is the #5 pick overall in the Credit Suisse coverage universe, and top pick among community/neighborhood retail REIT category, with an expected ~23 percent return.
Credit Suisse has an overall positive outlook on the shopping center REITs under coverage.
Credit Suisse - Regional Malls
Simon Property Group (NYSE: SPG) - $56.7 billion cap, 3.3 percent yield. Mall REIT Simon is the #1 pick in the entire Credit Suisse coverage universe, with an impressive ~32 percent expected total return over the next 12 months.
The second largest Class-A regional mall operator, General Growth Properties (NYSE: GGP), is rated at Neutral (#18 overall ranking by Credit Suisse). GGP has a $25 billion market cap, with an expected 12 month total return of 15 percent, including its 2.4 percent dividend yield.
Credit Suisse - Macerich: Downgraded To Underperform; $77 PT, Unchanged
The Credit Suisse price target of $77 represents a potential ~6.7 percent downside from MAC's previous close of $82.56 per share.
- Credit Suisse is "skeptical" of Macerich management's stated plans to reach a $100 per share valuation range; "not about management's ability, but that there exists enough opportunities in the portfolio to generate 30% value creation through either development, price realization, or margin improvement."
- Based upon Credit Suisse estimates, "the MAC portfolio of mall assets is currently valued at a 4.6% implied cap rate and their peers at a blended 5.3%..."
- Again, the lower cap rates imply that higher valuations are already baked into the MAC stock price.
Credit Suisse - Regency Centers: Downgraded To Underperform; $67 PT, Unchanged
The Credit Suisse $67 price target represents a potential 2.2 percent upside from REG's previous close of $64.80 per share.
- Credit Suisse noted that Regency has been the strongest shopping center REIT in its coverage universe YTD.
- While Credit Suisse acknowledged that REG Q1 results were strong, this was expected; the downgrade was a valuation call, "coupled with a lack of identifiable catalysts."
- While noting that the Regency team are great developers, Credit Suisse doesn't foresee "REG either ramping up their development pipeline going forward nor do we see them driving outsized earnings / NAV growth in the existing pipeline."
Credit Suisse - REIT Big Picture 2H 2015
Credit Suisse is overall positive regarding REIT performance moving forward, with a 17 percent total return, including a 3 percent yield, being the expected average return for the 34 REITs that Credit Suisse covers.
One of the major drivers for the overall strong REIT forecast is the Credit Suisse belief that 10-Yr Treasury interest rates will remain at ~2.85 percent at year-end 2015.
Latest Ratings for MAC
|Mar 2017||Goldman Sachs||Downgrades||Neutral||Sell|
|Dec 2016||KeyBanc||Upgrades||Sector Weight||Overweight|
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