Wells Fargo Securities
In the third quarter of 2011, National Retail Properties (NNN) acquired 53 properties containing 1.8 million square feet for $335 million at initial lease yields of what we estimate to range from 8.5-9.25 percent; 45 of these properties were previously announced. Given the size of this transaction and visibility into potential closures in Q4, management again increased its 2011 acquisition guidance to $600-700 million from $400-$500 million, previously.
Our current model assumes another $150 million of acquisitions in Q4 and $150 million in 2012 (in line with guidance). Recall, last year NNN provided initial 2011 acquisition guidance of $150 million as well. In Q3, NNN issued 9.2 million shares at $26.07 per share for net proceeds of about $229 million and floated $300 million 5.5 percent-senior unsecured notes due in 2021, netting the company $294 million in proceeds.
Year to date [in 2011], NNN has outperformed its net lease peers on a total return basis (+7.9 percent versus -0.3 percent for the group and +7.0 percent for the overall REIT group). We continue to believe that the cash dividend ($1.54 per share, 6.4 percent yield) is both attractive and safe.
Occupancy in the entire Kimco Realty (KIM) shopping center portfolio was up 10 basis points both year-over-year [in 3Q11] and sequentially at 93.0 percent. The national retailers continue to drive positive absorption in Kimco’s portfolio while leasing for the smaller mom and pop tenants remains challenged. Same-store cash NOI in the U.S. portfolio was up 1.6 percent over 3Q10 (3.3 percent in the total portfolio), the sixth quarterly increase in a row.
The company’s Canadian and Latin America exposure generated outsized same-store NOI growth, with Canada up 11.9 percent and Latin America up 17.6 percent (the majority of which came from development lease-up). Leasing continued to see increased activity in the portfolio, with Kimco signing 614 leases totaling 1.8 million square feet during the quarter.
Same-store leasing in the U.S. included 79 new leases for 374,000 square feet and 184 leases for renewals and options, totaling 775,000 square feet. Same-store rent spreads on new leases and renewals were 2.7 percent in the U.S., which was comprised of 1.1 percent on new leases and 3.5 percent on renewal leases.
National Retail Properties (NNN) management raised its 2011 funds from operations/per share guidance to $1.54-1.56 per share from $1.52-1.55 per share. The company also provided initial 2012 FFO guidance of $1.62-1.67/share. We are revising our 2011 and 2012 FFO/share estimates to $1.56 and $1.67, respectively, from $1.53 and $1.64 previously.
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 10 percent premium to our dividend discount model value of $24.40, which assumes a 9.5 percent cost of capital and a 3.0 percent dividend growth rate.
Jerry L. Doctrow
We are introducing 2013 FFO (funds from operations) and FAD (funds available for distribution) per share estimates of $2.43 and $2.42, respectively, for LTC Properties (LTC), indicating 6.1 percent FFO per share growth and 6.1 percent FAD per share growth. Very modest annual rent increases and accretive acquisitions funded 50 percent by debt, effectively increasing LTC’s leverage, drive earnings growth.
Key 2013 assumptions: $120 million of net investments at a 10.5 percent GAAP yield with only $60 million of equity issuance between $32 and $34 per share and average debt cost of 5.3 percent. We assume incremental debt costs increase 25 basis points in 2013 from 2012 with minimal impact on estimates.
Maintain Buy rating: LTC shares have run through our prior $30 target price but continue to trade at a valuation discount to the health-care REIT sector at 13.5 times 2012 FAD per share vs. a 14.1 times median for the group. Given LTC’s very low debt levels and ability to accretively invest, we believe it should trade at or above the health-care REIT median, and we are increasing our target price to $32 per share.
Andrew DiZio, CFA
Janney Capital Markets
We view W. P. Carey & Co. LLC as well positioned to increase its dividend payout in coming years as the LLC supplements net operating income from its wholly owned properties with investment management revenue. Acquisition volume in the CPA REITs [a series of income-generating, non-traded managed REIT funds] ramped in 2010-2011 (over $2 billion combined through 3Q11) following relatively slow years in 2008-2009 ($960 million combined), meaning Carey’s deferred fee stream, the portion of acquisition fees in CPA 17 paid over 3 years, has been building at a higher rate than in prior years.
The LLC also owns over $450 million in CPA shares, receiving annual cash flow through dividends equating to $0.80/share. Longer term, CPA 15 is nearing the end of its expected lifespan, and its board has formed a committee to explore liquidation options (a multi-year process), which will likely generate additional revenue to the LLC in the form of disposition fees. With an outlook for further dividend growth in a low-yield environment, we reiterate our Buy rating with a $45 fair value.
Our model suggests total 2012 dividends could be 4.9 percent above 2011’s payout, assuming just $600 million in CPA 17 acquisitions and no changes to the wholly-owned portfolio; higher investment levels may drive greater increases. Our outlook does assume a 75 basis points increase in borrowing costs on the line of credit, which is up for renewal in June 2012.
We raise our 2011E (estimate) to $4.63 from $4.48 and increase 2012E and 2013E to $3.31 and $3.42, respectively, from $2.93 and $3.05. Increases are primarily due to a model adjustment to more accurately reflect the dividend income received by the LLC from its ownership in the CPA REITs. We assume $150 million in quarterly CPA acquisitions through 2013. Our estimates do not include the dilutive effect of eventual long-term financing for Carey’s line of credit balance.
Cedar Shopping Center’s (CDR) new management team is doing an effective job, in our view, of focusing its attention on a core portfolio of stable shopping centers, improving its balance sheet. The post-asset sales portfolio will consist of 92 properties in their core Mid-Atlantic and Northeast markets with 93 percent or higher same store occupancy over the last five years with stable same-store net operating income (NOI). The majority of the properties, 77 percent, are supermarket anchored.
Management is focused on preserving capital and is not pursuing acquisitions or undertaking new developments until its balance sheet improves. Occupancy including redevelopments is 91.4 percent, up 90 basis points year over year and down 60 basis points sequentially. Same-space occupancy is 93.9 percent, up 70 basis points year over year.