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Essential IR Insights Newsletter - February 2023

Wednesday, North American real estate edition


BMO Capital Markets analyst John Kim lifted his investment opinion on HCP Inc. to "market perform," with a per-share price target on the company's stock of $30.

Kim said that although HCP has underperformed the overall REIT sector since the start of 2016, the company has resolved most of his concerns in recent months. He pointed to the company's improved leadership team, recently completed skilled nursing portfolio spinoff, reduced exposure to Brookdale Senior Living Inc. and a 36% lower dividend.

"We believe HCP is moderately expensive, but with a favorable asset mix," Kim said in a Dec. 12 note. He noted, however, that the company could still face cyclical headwinds in the senior housing sector and potentially higher CapEx in its life science and medical office portfolios.

Separately, Kim on Dec. 13 upgraded Camden Property Trust to "market perform," citing the company's better-than-expected performance despite weakness in the oil-focused Houston market. His price target on the company's stock is $83 per share.

The analyst lauded Camden for "weathering the storm" in Houston and delivering same-store NOI growth of 6.5% during the third quarter, which is higher than its apartment REIT peers' 6.3%. Although new supply is expected to top out in 2017, Kim said the risks are likely already priced into the stock, noting that the company has a best-in-class balance sheet and an expected attractive return on invested capital in the sector.

In a Dec. 13 note, Wells Fargo Securities LLC analyst Jeffrey Donnelly upgraded Choice Hotels International Inc. to "outperform" from "market perform." The analyst said he expects Choice Hotels to announce the monetization of its SkyTouch platform in the near term, which he said should be a positive for the stock.

Donnelly also expects the stock to benefit from outsized earnings growth from franchise businesses in the current environment and the possibility of corporate tax cuts, as well as continued RevPAR outperformance relative to its chain scales.

Meanwhile, Wells Fargo Securities analyst Todd Stender on Dec. 13 raised Healthcare Realty Trust Inc. to "outperform" from "market perform." Stender offered a favorable view of Healthcare Realty's prospects for beating the overall healthcare REIT sector's same-store NOI growth, given expectations for 17% of the company's leases being rolled over in 2017 and 15% in the succeeding two years. He posited that the company's recent acquisitions appear to be in line with its stance of staying in mainly on-campus settings in high-barrier markets. He also sees the company's recent deal to sell three inpatient rehabilitation facilities as a positive, calling it a demonstration of management's "commitment to continue to shift the portfolio away from inpatient and towards outpatient settings."

Further, Wells Fargo Securities analyst Blaine Heck elevated his rating on Liberty Property Trust to "outperform" from "market perform." Fueled in part by modest occupancy gains and strong embedded rent bumps, Liberty has outperformed its peers in the industrial sector with a year-to-date run of 31%, Heck said in a Dec. 13 note. He also posited that Liberty's large, pre-leased pipeline should facilitate future earnings growth and views the company's valuation as discounted relative to its industrial peers.

Heck also upgraded Paramount Group Inc. to "outperform" from "market perform." The analyst said an overhang stemming from increased vacancies at four of the company's properties likely caused the stock to underperform the office REIT sector in 2016. However, he expects the company to see "a significant NOI ramp from current levels" once leases are signed for the vacant space.


Donnelly, of Wells Fargo, downgraded LaSalle Hotel Properties and Xenia Hotels & Resorts Inc. to "market perform" from "outperform."

Donnelly said he believes LaSalle Hotel's exposure to the San Franciso and New York City markets could put its outsized earnings at risk in the next few quarters. He also thinks that the company's management is unlikely to reinstate guidance anytime soon and that investors may potentially "gravitate to those incrementally more positive." The analyst, meanwhile, attributed his rating downgrade on Xenia Hotels in part to the potential for continued risk in the Houston market that stems from outsized supply growth and uncertain policies in January 2017.

Wells Fargo Securities' Stender in the Dec. 13 note downgraded Welltower Inc. to "market perform" from "outperform," and Medical Properties Trust Inc. and Senior Housing Properties Trust to "underperform" from "market perform."

Stender said the Welltower downgrade stems from his expectations for more headwinds than tailwinds for the company in delivering better-than-average funds from operations per-share growth relative to its peers, given projected higher sales volumes in the 2016 fourth quarter and into 2017, as well as increased market chatter over higher wage inflation and expanded new supply levels in the senior housing arena.

For Medical Properties Trust, Stender said he sees reduced risk appetite mainly because of the company's "willingness to take on more mortgage investments than its peers."

"In general, we prefer REITs to acquire real estate, which can provide potential participation in equity value over time, a source of potential liquidity in times of financial market stress as the asset can serve as collateral for a loan, and better relative visibility into the duration of cash flows relative to mortgage loans that generally have a finite period despite being funded with long-term equity," Stender said in the note. He also highlighted the fact that the company has already more than doubled its fourth-quarter mortgage investments after closing its $1.25 billion investment in a nine-facility acute care hospital portfolio operated by Steward Health Care System LLC, essentially making the latter the REIT's largest tenant.

For Senior Housing Properties, Stender argued that it has been challenging for the company to issue equity at a price equating to his $22-per-share NAV estimate, leading the company to sell its stake in its Vertex buildings in Boston to pay down debt. He also noted the company's "deepening relationship" with Five Star Quality Care, its largest tenant, and the lack of a dividend increase since the fourth quarter of 2012. "[U]ntil better visibility into the rising dividend story emerges, we believe the shares could underperform its healthcare peers going forward," Stender said.

Wells Fargo Securities' Heck lowered his investment opinion on Duke Realty Corp. to "market perform" from "outperform."

The analyst said in a Dec. 13 note that the company's stock has risen 27% thus far in 2016, which is largely in line with its peers in the industrial space. Although he remains positive on Duke Realty's robust operating portfolio and strategic plan, Heck predicts the company will see steady to declining occupancy levels in 2017 and that greater investor scrutiny and uncertainty surrounding the REIT's medical office building portfolio will drive a more balanced risk/reward scenario for the stock in 2017.

Heck also cut his rating on Douglas Emmett Inc. to "market perform" from "outperform," saying the strength of the Los Angeles market is likely already reflected in the company's current share prices. The analyst added that the company's investments in aggressively priced acquisitions have probably caused investor unease with leverage levels.