SECTOR REVIEW
Short versus Long Term Stock Calls
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REITs: Five Years On. With this report, Credit Suisse re-launches its
coverage of U.S. REITs. Moreover, we provide earnings estimates through
2013 in order to capture important long-term trends.
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REITs: Four Long-Term Drivers. We review four factors that we believe
will occur over the next five years: (1) rising debt costs, (2) continued
deleveraging, (3) declining EBITDAs with job losses, and (4) a low supply
rent recovery for the apartment sector.
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Earnings: One versus Five Year (1). Our five year forecast ironically is for
flat sector earnings (see Exhibit 30). However, the underlying changes are
large depending on the period:
o Short Term - well capitalized Retail/Office. We think the
best 2010-2011 earnings profiles will be flat, led by well
capitalized retail and office REITs such as Simon (tk: SPG),
Realty Income (tk: O), and Boston Properties (tk: BXP).
o Long Term - Apartments. We think the best recovery profiles
will be apartment REITs, due to financing advantages and high
economic sensitivity. In contrast, we think secular factors,
along with more challenging rental comps keep long-term retail
growth muted.
o Any Term. Across sectors, a key factor is balance sheet.
Lower marginal debt costs and a lack of equity dilution lead to
higher growth across sectors. Our greatest earnings declines
came from large deleveragers (SLG, MAC), with subtle
intrasector differentiation (AVB’s 2013 growth rate exceeds
BRE’s, primarily due to deleveraging/mark to market factors).
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Valuation: One versus Five Year (2). Short term, we find apartment
valuations at risk given high multiples and top-line risk (see Exhibit 43).
However, apartment valuations look more reasonable on 2013 estimates.
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Top Picks - Debt, Offshore, and Simon. We tend to like higher yielding
REIT debt better than the equity given our flat earnings profile (see Exhibit
30). Domestically, our best idea is Simon (tk: SPG) due to its combined low
multiple and lack of development entanglements. On a global basis, Simon
also screens as inexpensive (see Exhibit 35), but perhaps on a “cheap for a
reason” basis (U.S. retail fundamentals lag those of other major markets).