Unveiling 2017 FFO Estimates; Key Themes to Watch

Richard Anderson
Richard Anderson Managing Director, Americas Research
March 7, 2016



While we are among the last to issue 2017 FFO estimates, we do so intentionally as we believe accuracy and relevance of the estimates are enhanced with current year guidance in the books. As we show in Exhibit 1, we provide both our initial 2017 estimates and the key modeling assumptions behind them (excluding CCP and SBRA which we expect to provide a 2016 outlook shortly). Our updated models are available upon request. Key investment themes provided below for the office, multifamily and health care sectors.

Key Points

Office: Our Buy rated office REITs have a bend toward second tier/suburban locations on the view that many of these markets are seeing incremental capital flow that is supporting property values: OFC, BDN and PKY. Meanwhile, we view the diversity of the Los Angeles office market (legal, financial services, entertainment, retail, insurance, technology, education, etc.) as a key contributor to our Buy rating on DEI. Finally, we believe the way to play technology markets is through life science REIT, ARE. Distinguishing characteristics include "real-time" cash flow (e.g., 2016 cash releasing spreads of 6%-9%) that is diversified across several research hub markets such has Boston, San Francisco, New York City and San Diego.

Multifamily: The sector lends itself to many blanket statements, including ongoing demand for rental housing driven by the Millennial population that is less committal about many things in life, in comparison to predecessor generations. This has proven to be less of a marriage (pun intended) to home ownership. It is true that pockets of supply (Seattle, Houston, DC, parts of NYC, etc.) are requiring a deeper analysis in spots, but overall we expect reasonably healthy internal growth prospects from the sector beyond 2017 (we assume same store moderates in 2017). Our thesis here is to own three REITs that are unlike one another, and hence may cycle out of sync in a manner that creates a diversified approach -- Buy ratings on ESS (West Coast), MAA (Southeast/Sunbelt) and UDR (multiple price points and a mix of urban and suburban).

Health Care: Our recent upgrade of VTR to Buy (PT assumes 18x 2016 AFFO, which has recent precedence) was based on cash flow clarity tied to strong rent coverage (e.g., 1.7x for post-acute). This visibility plus dividend growth prospects from a well-capitalized and large organization wins out over the operating risks of some of its skilled nursing and senior housing tenants -- a key point of discussion from our shop lately. We also like the balance sheet and the (even better) coverage metrics from Buy-rated LTC.

View the full research report for important disclosure and analyst certification information. Ratings and/or Price Targets may change. Refer to the US Equity Research Portal library for the most recent company research.

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