Mizuho Makes Big Retail REIT Call, Picks 10 Favorites

"Quality ‘trumps' value," Mizuho analyst Haendel St. Juste said. "Retail REITs are off to a strong start in 2016 (+5 percent YTD for malls, +7 percent YTD for shopping centers). Looking ahead, we think there is more upside (+10 percent to PTs) and are initiating coverage with a positive outlook."

Initiations

• American Assets Trust, Inc AAT, $46.00 PT
• General Growth Properties Inc GGP, $33.00 PT
• Simon Property Group Inc SPG, $233.00 PT
• Taubman Centers, Inc. TCO, $86.00 PT

• Brixmor Property Group Inc BRX, $23.00 PT
• CBL & Associates Properties, Inc. CBL, $13.00 PT
• DDR Corp DDR, $19.00 PT
• Federal Realty Investment Trust FRT, $158.00 PT
• Kimco Realty Corp KIM, $28.50 PT
• Macerich Company MAC, $88.00 PT

Related Link: Your REIT Recession Playbook

Justifying Initiations

St. Juste explained the various initiations by citing favorable fundamentals, tight supply and strong demand. "Our stock picks have a pronounced bias toward higher productivity platforms, a somewhat consensus view, but an appropriate one given the current environment and prevailing valuations."

Furthermore, St. Juste stated that Mizuho prefers "A" Malls, and the firm has a "quality bias."

"Our fundamental and valuation analysis support our ‘A' Mall bias given better valuation, growth and risk profiles. Shopping Centers looks fairly valued given YTD gains, while notable headwinds (store closure risks, weakening demand/financing, eCommerce threat), and higher leverage suggest limited n/t upside for ‘B' Mall REITs, despite steep stock discounts," St. Juste elaborated.

"Our Buy-rated stocks (AAT, GGP, SPG, TCO) offer attractive valuation, as well as pricing power and multi-year themes, supporting compelling growth potential (upside to PTs)."

St. Juste concluded, "Despite potential headwinds (widening CMBS spreads, recession, eCommerce, cost-conscious consumer, slowing earnings growth), we see room for near-term optimism (favorable supply/demand, recently revised FIRPTA rules, upcoming GICS catalysts, '16 ssNOI upside, and attractive return potential). Today, we see the best risk-reward in higher productivity landlords like GGP, SPG, TCO in the Malls and ATT (and FRT longer-term) in the Shopping Centers subsector, trading in most cases at discounts to NAV, but also offer compelling earnings and dividend growth."