LAS VEGAS—The first day of two at the NAREIT Annual Convention known as REITWorld is now complete. And according to RBC Capital Markets LLC analyst Rich Moore, management teams are broadly upbeat about business prospects for the remainder of 2015 and have taken a cautious stance looking forward to 2016.

"The debt markets have broadly returned to normalcy, with a modest increase in total costs with the rise in benchmark interest rates," he explains. "Equity markets are the most easily accessible by the highest-quality companies under current market conditions."

Some observations at a broader level Moore noticed include the following:

  • Operating fundamentals currently appear healthy although macro headwinds have kept 2016 expectations in check.
  • New supply remains generally in check, with only certain geographic pockets and real estate sectors set to experience an uptick.
  • Acquisitions remain challenging, as cap rates have yet to reflect the rising interest rate environment. A lack of financing availability for higher-leverage buyers could open up opportunities for the REITs.
  • The earnings growth outlook for 2016 could moderate in 2016 due to modestly slowing demand.
  • However, dividends should continue to grow steadily in 2016.

RBC Capital Markets analyst Rich Mooretakes a closer look at some companies and property types and what can be expected going forward. The views expressed below are the author's own.

Office

Parkway Properties Inc. (Nasdaq: PKY – $15.79; Sector Perform)

  • Near-term acquisitions will likely be adjacent to existing assets that create synergies.
  • The JV partner at Courvoisier Centre appears interested in growing its relationship with PKY.
  • The company has made solid progress disposing of non-core assets, with only five remaining.
  • There is solid interest in the BMC space, but cash rents will likely not commence until 2017.
  • PKY is tracking solid demand for the US Airways building, with tenants needing space now.

Government Properties Income Trust (NYSE: GOV – $15.64; Underperform)

  • Management plans to be patient over the next six months given the recent market volatility.
  • GOV reiterated there is no need to reduce the dividend, and indicated it is currently covered.
  • Private valuations are steep, but the company could complete higher-yielding acquisitions.
  • Management is tracking 300,00 SF of new leases; spreads should remain largely flat.
  • Despite higher leverage metrics, GOV remains comfortable with its current position.

Corporate Office Properties Trust (NYSE: OFC – $21.55; Sector Perform)

  • The DoD budget should increase by $25B in FY16 and $15B in FY17, stabilizing near 2011 levels.
  • OFC expects activity will increase in 2H16; the government may award longer-term contracts.
  • The company appears more focused on new developments; acquisitions are unlikely.
  • Management will remain active recycling non-core assets in order to fund investment activity.
  • The niche portfolio currently generates 75% of ABR and it should increase to ~85% by YE17.

Retail

Acadia Realty Trust (NYSE: AKR – $32.31; Outperform)

  • Core street retail productivity remains productive despite slowdown in Gateway markets.
  • Core acquisition activity should remain strong as financing restricts higher-leverage bidders.
  • However, it remains a seller's market for both core and fund portfolios.
  • The company has adequate access to both debt and equity capital at current share price.
  • Fund IV should be completed by August 2016, giving way to the inception of Fund V.

Brixmor Property Group Inc. (NYSE: BRX – $24.82; Outperform)

  • Personnel additions to the investment team indicate the potential for activity in the long term.
  • Raising The Bar initiative should yield significant results through the end of the decade.
  • In addition, management continues to review larger scale redevelopment opportunities.
  • Look for $1.2 billion of bond offerings in 2016 with staggered terms.
  • Management hopes to achieve 6.0x debt/EBITDA over the medium term.

Macerich Company (Nasdaq: MAC – $76.18; Sector Perform)

  • Long-term same-store NOI growth of 4–5% is reasonable in management's view.
  • Bankruptcies in 2016 are likely to be reorganization-oriented as opposed to liquidation.
  • An incremental 150 bps of margin improvement is expected to come from revenue growth.
  • For secured debt financing, banks, LifeCo's, and CMBS are available to Macerich.
  • Macerich completed an accelerated stock repurchase (ASR) of 4.1 million shares.

Regency Centers Corporation (NYSE: REG – $66.04; Outperform)

  • Recent management changes put additional focus on ground-up development.
  • Look for the development pipeline to reach $300 million in starts annually.
  • Specialty/organic grocers are key drivers for developments.
  • Development spending can be funded without accessing the equity market.
  • Debt spreads have risen by 20 bps from the lows in 3Q15.

Rouse Properties, Inc. (NYSE: RSE – $15.76; Outperform)

  • At recent Carlsbad acquisition, RSE could recapture space by consolidating the two Macy's.
  • Management suggested annual same store growth of 3–4% is achievable.
  • Acquisition pace could slow as capital is allocated toward new redevelopment projects.
  • Management expects to be able to fund its current pipeline without additional equity.
  • October tenant sales at the company's portfolio were modest but not disappointing.

Weingarten Realty Investors (Nasdaq: WRI – $33.18; Outperform)

  • Over the last year, more positive than negative news has come out of retailers.
  • Houston is likely to see continued slowing in the job market, but little impact on WRI.
  • Development remains slow, with more activity in the city core as opposed to suburbs.
  • Debt spreads have tightened but remain 10–15 bps higher than 2Q levels.
  • National grocers are selectively adding stores while consolidation is likely for niche players.

Multifamily

Avalonbay Communities Inc. (NYSE: AVB – $175.16; Outperform)

  • AVB is starting to see condo conversions in NY, BOS, SEA, SF, and DC.
  • AVB favors the suburban markets over the next few years due to the lower supply outlook.
  • Increasing household formation should help to absorb the new supply.
  • Multifamily will likely account for 35–40% of total housing supply.
  • AVB is building larger units in some markets due to the scarcity of large units.

Apartment Investment and Management Company (NYSE: AIV – $36.72; Sector Perform)

  • AIV remains committed to a diversified portfolio with long-term cash flow predictability.
  • Expenses could be elevated next year as AIV implements a site-level efficiency program.
  • Management believes price dislocation is due to CFO departure and large acquisition in No. Cal.
  • AIV will likely build its Seattle allocation when the market is out of the favor.
  • AIV has plenty of backlog to support annual redevelopment spending of $200m.

Student Housing

Education Realty Trust (NYSE: EDR – $35.79; Outperform)

  • EDR expects no demand impact from universities that cater to petroleum degrees.
  • Leasing continues to be healthy, helped by online new/renewal processes.
  • EDR expects to have $100m of additional development announcements for 2017 delivery.
  • ONE Plan interest is higher than ever, with 16 universities seeking RFPs for PIPE investment.
  • EDR is marketing older quality product given attractive relative valuations.

Healthcare

HCP Inc. (NYSE: HCP$33.41; Underperform)

  • SNFs are the low-cost provider and, despite concerns, should benefit from healthcare reform.
  • The expected HCRMC coverage fell as SNFs had a soft 3Q; trends should improve in 4Q/1Q.
  • HCP will be focused on opportunistic acquisitions in the near term as valuations stabilize.
  • HCP is encouraged by the UK market with a focus on private-pay care home developments.
  • Management is comfortable with SH supply, as rental rates are typically 10–20% higher.

Physicians Realty Trust (NYSE: DOC – $15.47; Outperform)

  • The pipeline is solid and may be stronger than it has ever been in the company's history.
  • Private valuations have not moved recently and will likely stay largely flat in the near term.
  • PE funds remain active and continue to use of significant leverage to acquire assets.
  • Organic growth should trend near the top end of the 2.0–3.0% range due to the 603 assets.
  • Management will look to issue another larger unsecured notes offering in 2016.

Ventas, Inc. (NYSE: VTR – $50.06; Outperform)

  • Senior housing supply must grow 3.0% annually to keep pace with demand and obsolescence.
  • VTR can deploy $1.3 billion per year on a leverage-neutral basis including $500 million of sales.
  • Redevelopment opportunities are attractive; VTR expects it could start $200 million per year.
  • Management appears resistant to push leverage much higher above long-term target range.
  • The Ardent platform will be able to implement significant synergies at not-for-profit hospitals.

Lodging

Hospitality Properties Trust (NYSE: HPT – $26.55; Underperform)

  • Sonesta should post good relative growth in '16 due to less renovation activity.
  • HPT is focused on building deposits over the next few years with only Wyndham a concern.
  • There are pockets of new supply, but overall business remains good for the hotel portfolio.
  • HPT will likely look to the debt market to reduce the line of credit balance.
  • Cash flow from TA is expected to improve as newly acquired centers stabilize.

Pebblebrook Hotel Trust (NYSE: PEB – $32.91; Outperform)

  • PEB expects demand to outpace supply through 2017, supporting continued RevPAR growth.
  • Less ability to shift the guest mix toward higher-rated customers has hurt RevPAR growth.
  • Overbooking and longer lead times should help to offset last-minute cancellations.
  • PEB expects to use disposition proceeds to retire preferred equity in 2016.
  • Citywides in SF should be strongest in 1Q16, with citywides flat ex-Super Bowl.

Summit Hotel Properties (NYSE: INN – $12.81; Outperform)

  • Business remains good headed into the seasonally softer November/December.
  • Only 10% of INN's markets have supply, with only half of the supply expected to be disruptive.
  • Houston will likely post flat RevPAR growth next year.
  • ARC Hospitality's likelihood to close both tranches of the acquisitions from INN increased.
  • INN has $20 million left of the deposit should ARC Hospitality not be able to close.

Industrial

Duke Realty Corp. (NYSE: DRE – $19.49; Outperform)

  • DRE reiterated its strategy and plans to stay the course despite recent leadership changes.
  • Developments should create value, but management will be cautious with speculative starts.
  • Private market valuations are too steep, making it difficult to complete acquisitions.
  • DRE will likely sell ~$800 million by YE16 to take advantage of current valuations. Management will use the sale proceeds to de-lever, preparing DRE for a potential downturn

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