From the March 2011 issue of Research Magazine • Subscribe!

March 1, 2011

REITs: Looking Up

There are positive economic and financial signs that bode well for real-estate investment trusts that focus on retail and other commercial sectors.

Sri Nagarajan
FBR Capital Markets
646-885-5429
snagarajan@fbr.com

We are initiating coverage of Cedar Shopping Centers (CDR) with an Outperform rating and a 12-month price target of $7.00 per share. We base our investment thesis on CDR shares on our NAV (net asset value) valuation of $7.00 per share and our applied premium to NAV of 0 percent.
We apply no premium or discount to the value created for shareholders through acquisitions, most of which will be in the RioCan joint venture, because of the offsetting high leverage and slow fundamental growth expectations …. The defensive nature of the company’s grocery/drugstore-anchored portfolio should provide continued stability, as the overall portfolio is well occupied and as future lease rolls appear minimal.

Heavy acquisitions should continue but will require more equity. We expect Cedar to continue to acquire premier grocery/drugstore-anchored properties in secondary markets across the Mid-Atlantic and Northeast, the majority of which will be in the recently formed RioCan joint venture.
Due to the 56 percent debt-to-gross asset value measure, however, we expect an equity offering to accompany acquisitions. As of September 30, 2010, the company had acquired $357 million in strip-center assets, $344 million of which were in the RioCan joint venture.

Given the aggregate size of Cedar and RioCan’s clear appetite for assets in Cedar’s core markets, as well as in the company’s existing portfolio, we expect that RioCan will look to acquire a larger stake in Cedar. The 12.9 percent discount at which we estimate CDR to trade to NAV presents an attractive opportunity for RioCan to increase its level of interest in sleepy secondary markets of the Mid-Atlantic and Northeast.

R.J. Milligan
Raymond James & Associates
800-248-8863

In the short term, [National Retail Properties’] dividend remains well covered with high-quality earnings (6.0 percent yield); however, National Retail is dependent on growing its funds from operations, FFO, (and its dividend) through acquisitions, which we believe are priced into the stock (NNN).
Admittedly, the net-lease sector could be an outperformer if acquisition activity increases dramatically; however, at this time, we are recommending investors assume a more offensive/ economically levered approach in sectors with more organic growth.

On an FFO basis, NNN trades at 16.7 times our 2011 estimate, while our REITs coverage list trades at a weighted average 2011 FFO multiple of 16.2 times. We believe that the market should view National Retail Properties’ cash flows as positioned between equities and fixed income given the long-term structure of the tenant leases, and therefore, we think the dividend discount model is the most appropriate methodology for valuing the stock.

NNN is currently trading at a 5 percent premium to our dividend-discount model value of $24.09, which assumes a 9.5 percent cost of capital and a 3.0 percent dividend growth rate.

Jeffrey J. Donnelly, CFA
Wells Fargo Securities
617-603-4262
jeff.donnelly@wachovia.com

National Retail Properties acquired 25 properties for $88.8 million in Q3 and sold two properties for net proceeds of $1.4 million. We still believe sequential growth in NNN’s FFO/share is dependent on net acquisition activity … We expect volume to accelerate in 2011, but pricing is becoming more competitive.

Top-10 tenant representation declined from 47.2 percent of annualized base rent to 45.4 percent. Top tenants include the Pantry (8.6 percent of base rent), Susser (8.4 percent), AMC Theatres (5.7 percent), Road Ranger (3.7 percent), and Mister Car Wash (3.5 percent).  Convenience stores account for 25.3 percent of annualized base rent (-90 basis points, bp, from Q2) followed by full-service restaurants (9.8 percent, +60 bp) and auto parts (6.6 percent, -20 bp).

2011 FFO/share and funds available for distribution (FAD)/share guidance is between $1.47 and 1.52 and $1.62 and 1.67 respectively.

Management’s expectations were slightly below our prior estimates; accordingly we have reduced our estimated 2011 FFO/share to $1.50 from $1.56. Similarly our 2010 estimated FFO/share was reduced to $1.38 from $1.40 due to a slower acquisition pace.

Our valuation range of $24.00 to $26.00 is based on a 6.8 percent cap rate on 2011E pro-forma cash net- operating income (NOI) or 16-17 times estimated 2011 FFO/share.

Net-lease REITs provide a unique alternative for investors seeking high current income. NNN is well diversified, and its high cash dividend is adequately covered. We believe NNN is well positioned to drive external by taking advantage of accretive acquisition opportunities in 2011 …

Andrew DiZio, CFA
Janney Capital Markets
215-665-6439
adizio@janney.com

We continue to advocate [W. P. Carey] as an attractive investment on the basis of its strong cash flow and above-average 6.7 percent dividend yield. Carey’s owned real estate portfolio has suffered increased vacancy in recent quarters, but remains a steady cash producer while the LLC’s investment management business generates healthy recurring fees.

Additionally, we believe the improving credit markets are prompting Carey to explore the liquidation of Corporate Property Associates 14 (CPA 14), which would likely generate substantial fee revenue to WPC. With investor’s search for income providing a tailwind to high-yielding stocks, and the potential for a special dividend following a CPA liquidation event, we reiterate our Buy rating with a $33 FV (fair value).

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Consumer spending continues to rebound in the United States. The Commerce Department said spending increased 0.7 percent in December 2010 after rising by 0.3 percent in November. This represented a sixth consecutive month of gains as households drew down on their savings to finance purchases, according to reports, which is good news for shopping-center and other commercial REITS.

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