JoeChristensen
Along with its "The Road to the Final Four" analysis of the REIT sector, Citi analysts updated nine ratings in its universe, with upgrades for American Homes 4 Rent (NYSE:AMH), Essential Properties Realty Trust (NYSE:EPRT), Macerich (NYSE:MAC), Omega Healthcare Investors (NYSE:OHI), Park Hotels & Resorts (NYSE:PK), Tanger (NYSE:SKT) and downgrades for COPT Defense Properties (NYSE:CDP), Invitation Homes (NYSE:INVH), and Kimco Realty (NYSE:KIM).
In their REIT "tournament," American Homes 4 Rent (AMH) won the title, prevailing over finalists Prologis (NYSE:PLD), Welltower (NYSE:WELL), and SBAC Communications (NASDAQ:SBAC).
Ratings changes:
- American Homes 4 Rent (AMH) was upgraded to Buy from Neutral on the expectation for "multiple years of strong compounded earnings and NAV (net asset value) growth, which, along with some slight multiple expansion, will likely result in solid absolute and relative performance, in our view," the analysts led by Nick Joseph wrote in a note to clients. They expect AMN to see at least 4.5% same-store net operating income and 6.4% compounded earnings growth for the next few years, as the rent-to-own gap remains the widest in more than 30 years.
- Essential Properties (EPRT) rating was raised to Buy from Neutral, reflecting favorable investing spreads, relative valuation to other net lease REITs, improved confidence in its acquisition pipeline, and leverage below targeted metrics.
- Macerich (MAC) moved up to Neutral from Sell, as the financing market has stabilized and the shopping mall REIT has executed on refinancing or extending $2B of debt in 2023/2024YTD. "Additionally, operating fundamentals have continued to improve for the Mall sector overall, which helped drive a 90bp improvement in MAC’s occupancy over the past 12 months."
- Omega Healthcare Investors (OHI) advanced to Buy from Neutral as the outlook for skilled nursing facilities continues to improve. "We expect the occupancy and rent coverage to increase further as labor pressures ease and operator continue to effectively control costs. Tenant health issues are less of a concern now."
- Citi upgraded Park Hotels & Resorts (PK) to Buy from Neutral, reflecting its "discounted valuation relative to peers at ~10x EBITDA, expectations for continued balance sheet improvement as the company focuses on non-core asset sales, improving property results with over $300M invested across the portfolio, resilient resort exposure, and an 8% dividend yield, which incorporates expectations for a special dividend in 4Q24 in addition to regular-way quarterly dividends."
- Tanger (SKT) is upgraded to Buy from Neutral, chiefly on its premium internal growth profile and its ability to invest in accretive acquisitions. "SKT’s operating fundamentals continue to improve as the new management team has improved occupancy cost ratios (OCRs) to nearly 9% with upside into the 10-12% range. In addition, the long-term trend toward 5% temporary tenants vs. 10% today is expected to be another component to help drive premium internal growth profile versus Mall and Open-Air retail peers."
- COPT Defense Properties (CDP) was cut to Neutral from Buy. "While we view CDP’s sticky tenant base and focus in mission critical defense/IT markets positively, the limited ability to drive internal growth through rent increases combined with a more challenging development environment leads us to prefer other REIT sectors at this juncture."
- Invitation Homes (INVH) moved down to Neutral from Buy as refinancing headwinds in 2024 are expected to temper earnings growth. The single-family home rental REIT has ~$3.82B of rate swaps that will mature by mid-2025. " The swaps are fixing the underlying floating-rate debt at ~4.0%. Assuming INVH is able to refinance at ~5.5% long-term rates, Citi estimates ~450 bps lower earnings growth than INVH would otherwise see in 2025 and 2026.
- Kimco Realty (KIM) dropped to Neutral from Buy. "KIM underperformed peers in 2023 and has lagged YTD given more muted growth and questions about the ultimate accretion from the recently completed acquisition of RPT. In addition, initial 2024 guidance was below consensus and growth (2.7% AFFO growth in 2024) remains modest although ahead of peers (0.5%)."