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March 01, 2011 at 07:00 PM
Sri Nagarajan
FBR Capital Markets
646-885-5429
[email protected]
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
[email protected]
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).
