Plum Creek: REIT Broker Action

(REIT broker action report updated with upgrade of Plum Creek Timber.)
NEW YORK (TheStreet) -- Real estate stocks were in focus following the latest broker action on Plum Creek Timber ( PCL).

On Friday JPMorgan Chase ( JPM) analysts upgraded shares of Equity Residential ( EQR), Taubman Centers ( TCO), Weingarten Realty Investors ( WRI), Lexington Realty Trust ( LXP), SL Green Realty ( SLG) and Kilroy Realty ( KRC) to overweight ratings.

JPMorgan analyst Anthony Paolone also issued upgrades on shares of Brookfield Properties ( BPO), DCT Industrial Trust ( DCT), Education Realty Trust ( EDR), Equity One ( EQY) and Kimco Realty ( KIM).

The analyst issued downgrades on Brandywine Realty Trust ( BDN), Corporate Office Properties ( OFC), Nationwide Health Properties ( NHP), Tanger Factory Outlet Centers ( SKT) and Ramco-Gershenson Properties ( RPT).

Here then, is a breakdown of recent upgrades and downgrades in the real estate investment trust sector and what drove the broker actions.

Plum Creek Timber

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Plum Creek Timber ( PCL)

Company Profile: Plum Creek Timber is a Seattle-based real estate investment trust which owns and manages timberlands in the United States. Its products include lumber products, plywood, medium density fiberboard, and related by-products, such as wood chips.

Plum Creek was upgraded to neutral, from underperform, by analysts at Zacks Investment Research who had a $42 price target on the stock.

Analyst Meena Goyal noted that "we are changing our long-term recommendation for Plum Creek from Underperform to Neutral as we anticipate it to perform in line with the broader market."

Goyal said that Plum Creek's diversified timber and land base allow it to benefit from large economies of scale. Plum Creek is the largest publicly traded timber REIT, he pointed out.

"In addition, the upsurge in demographic trends driving housing markets and demand for real estate properties across the country provides a strong economic backdrop for the company to demonstrate solid financial performance in the future," the analyst added.

"However, the cyclical nature of the business, cutthroat competition, and strict environment policies undermines its growth potential. "

Timber REITs outperformed both the overall equity REIT market and the S&P 500 in 2010 though Plum Creek returned just 2.3%.

Analysts at Keefe, Bruyette & Woods noted that timber REITs limited harvest volumes as much as 30% below sustainable outputs in 2010 as a means of maximizing trees rather than selling into a depressed market. As such, the research firm expects 25% growth in timber EBITDA for 2010, and 10% to 15% growth in 2011.

Equity Residential

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Equity Residential ( EQR)

Company Profile: Equity Residential is a Chicago-based real estate investment trust company focused on the acquisition, development and management of quality apartment properties in top United States growth markets.

Equity Residential was upgraded to overweight, from neutral, and Paolone set a price target of $56 on the stock based on its "discounted cash flow approach to valuation."

Paolone cited his view that "EQR management has had the best pulse on the market, and we think external growth decisions over the past two years have positioned the portfolio well for the recovering macro environment in 2011."

He added that Equity Residential should enjoy the second highest same-store net operating income growth, next to AvalonBay Communites ( AVB), "and trades at only a modest premium to immediate multifamily peers."

"We consequently like the value proposition with this name," Paolone noted.

Taubman Centers

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Taubman Centers ( TCO)

Company Profile: Bloomfield Hills, Mich.-based Taubman Centers is engaged in the ownership, management, leasing, acquisition, disposition, development and expansion of regional and super-regional retail shopping centers.

Taubman Centers, now with an overweight rating, saw its target price lifted by $6 to $57.

Paolone noted two main drivers of his Taubman upgrade.

"First, we think the stock's relative valuation within the mall sector and overall REIT group is attractive -- particularly on an implied cap rate basis given its high portfolio quality."

"Second, we think marginal fundamentals for TCO's portfolio should improve considerably in 2011 following a year of good sales growth...particularly for higher-end tenants."

The analyst lifted his price target on Taubman "largely on account of a lower assumed discount rate resulting from an improvement in the overall environment (market discount rates and operational improvements)."

Weingarten Realty Investors

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Weingarten Realty Investors ( WRI)

Company Profile: Houston-based Weingarten Realty Investors is a real estate investment trust whose businesses include leasing space to tenants in shopping and industrial centers and managing centers for joint ventures.

Paolone lifted overweight-rated Weingarten Realty Investors' price target by $2 to $27.

The analyst said he is generally bullish on "stocks that operate portfolios with more economically leveraged property types (such as apartments and central business district office) at this part of the cycle."

He conceded, however, that Weingarten's 2011 outlook is favorable and he likes its valuation.

"Weingarten is beginning to see some traction on the leasing front, and we expect this will continue throughout 2011 as the company makes incremental progress leasing up its core portfolio and unstabilized developments -- which should be a marginal plus for earnings."

Lexington Realty Trust

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Lexington Realty Trust ( LXP)

Company Profile: New York City-based Lexington Realty Trust is a self-managed and self-administered Maryland statutory real estate investment trust which acquires, owns, and manages a diversified portfolio of net leased office, industrial and retail properties.

Lexington Realty Trust was upgraded to overweight from neutral by Paolone, who set a $10 price target on LXP shares.

Paolone upgraded the stock based on his view that "management has made progress with its balance sheet (debt maturities are essentially a non-issue at this point), the company's portfolio has performed well, and we believe the company could see an outsized dividend increase in 2011 -- on top of what is already an above-average dividend from both a yield (5.8%) and payout ratio (about 50%) perspective."

He added that "we think the potential sale of its Inland joint venture assets could provide significant cash to reinvest in the business, and also the sale of non-core assets should improve portfolio quality. Also important is the simple fact that the stock appears cheap."

Lexington Realty was recently listed on TheStreet's list of 10 Top Buy-Rated Real Estate Stocks for 2011.

Analysts from Keefe, Bruyette & Woods tapped the stock, along with Alexandria Real Estate ( ARE), as REITs poised to benefit as restrictive lending for new construction and little new supply help the office and industrial REIT subsector rebound at a relatively quicker pace.

Last fall Lexington Realty increased its dividend by 15% to 11.5 cents per share. The higher dividend was paid today to holders of record on Dec. 31, bringing LXP's yield to around 5.7%.

SL Green Realty

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SL Green Realty ( SLG)

Company Profile: New York City-based SL Green is a self-managed real estate investment trust, with in-house capabilities in property management, acquisitions, financing, development, construction and leasing.

SL Green was also upgraded to an overweight rating. Paolone lifted his target on the REIT's shares by $19 to $81.

SL Green's "core New York City office portfolio will be among the first office portfolios to benefit from an economic recovery," the analyst noted.

"Combined with SLG's transaction activity as well as future redevelopment prospects, we think the company is poised to produce above-average bottom-line earnings growth for the next couple of years."

Paolone added that he expects SL Green to boast a long-term growth rate of 6%, assuming 3% net operating income growth, leveraged to 5% cash flow growth, in addition to 100 basis points from external growth.

Kilroy Realty

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Kilroy Realty ( KRC)

Company Profile: Los Angeles-based Kilroy is a real estate investment trust which owns, operates, develops and acquires office and industrial real estate located in Southern California.

Kilroy Realty was upgraded to overweight, and its target price was lifted by a dollar to $36.

Paolone said the upgrade reflected Kilroy's "ability to complete accretive acquisitions, maintain a strong balance sheet, and increase occupancy."

"Looking ahead, we think the management team will step up and make further acquisitions and the California economy has the potential rebound rapidly at some point," the analyst added.

Still, downside risks include, the possibility of a major tenant terminating its lease, higher costs, land impairments, fewer acquisition opportunities and/or further deterioration of the California labor market or state finances.

Brookfield Properties

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Brookfield Properties ( BPO)

Company Profile: Toronto, Canada-based Brookfield Properties is a commercial real estate company, which is engaged in the ownership, development and management of premier commercial office properties in select cities and in the development of residential land.

Among Paolone's other upgrades, Brookfield Properties was upgraded to neutral, from underweight, and its price target was lifted by $2 to $17.

Brookfield Properties, also a commercial office REIT, recently posted a 37% jump in third-quarter funds from operations as it was able to lease more space to its commercial tenants. Funds from operations, or FFO, is a performance figure generally used by REITs to define cash flow from operations. Occupancy increased to 95.1%, up 30 basis points from the previous quarter.

Brookfield Properties was upgraded based on Paolone's view that the company's central business district office portfolio "should drive above-average core growth in the next couple of years, its balance sheet issues are behind it, and the sale of the residential business helps simplify the story."

"We believe these items should narrow BPO's 20-30% multiple gap relative to its NYC office REIT peers (based on FFO and AFFO). The Bank of America/Merrill Lynch lease at the World Financial Center remains a key risk (a potential 8 cents FFO/share hit, by our estimates) but should be largely priced into the stock."

DCT Industrial Trust

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DCT Industrial Trust ( DCT)

Company Profile: DCT Industrial Trust is a Denver, Colo.-based real estate company which owns, operates and develops high-quality bulk distribution and light industrial properties in high-volume distribution markets in the U.S. and Mexico.

DCT Industrial Trust, which was also listed among the 10 Top Buy-Rated Real Estate Stocks for 2011, was upgraded to neutral, from underweight, and its stock price was set at $5.

Paolone upgraded the stock citing his view that DCT's stock price offers relatively "decent" value to investors. He added that the company's " economically leveraged properties such as industrial should see more of a benefit as the recovery continues to unfold."

Paolone also believes DCT "is gaining some traction on the capital deployment front, and we suspect that its earnings should begin to turn the corner in 2011."

Keefe, Bruyette & Woods's Sheila McGrath highlighted DCT as one of her top REIT picks, saying that "although the company will continue to be negatively impacted by weak economy, it has the balance sheet strength to navigate through this challenging market and emerge as a beneficiary with external growth opportunities over the next several years."

She added that DCT's 86.9% occupancy remains below stability "which we believe should allow for more potential upside as markets recover." McGrath also said that "DCT's internal growth profile can surprise on the upside by driving occupancy and acquisition opportunities are starting to emerge."

Education Realty Trust

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Education Realty Trust ( EDR)

Company Profile: Memphis, Tenn.-based Education Realty Trust is a self-managed and self-advised real estate investment trust, which develops, acquires, owns and manages student housing communities located near university campuses.

Education Realty Trust was upgraded to neutral, from underweight, with a dollar higher price target at $7.

JPMorgan's Paolone upgraded the stock because he believes the REIT's "management team has done a good job of upgrading the company's portfolio quality/future growth prospects (particularly with the sale of the Place portfolio), as well as improving the company's balance sheet and liquidity position."

He added that "the stock trades at a 15-20% discount to the apartment REITs based on most metrics, but we think this is fair given the company's small cap size/niche property type."

Last fall, Education Realty Trust was listed on TheStreet's 5 Cheap Stocks to Own Now.

The report noted that Education Realty, created as a REIT in 2004, is one of the largest owners and operators of collegiate student housing in the United States. This makes it a stable but potentially lucrative investment, with 65 properties in 21 states. First, due to SEC regulations for real estate investment trusts, EDR returns a hefty portion of its profits via dividends -- a 2.7% yield as of this writing. Secondly, the numbers show a big upside for shares.

According to the U.S. Labor Department, college enrollment hit an all-time high last year, with more than 70% of high school graduates opting for college rather than trying their luck in a recession-heavy economy. But the big upside of Education Realty Trust is that the profits don't rely on student loans like for-profit education stocks that have been in the news in recent months.

The majority of the company's revenues (86.9%) are derived from its student housing leasing. EDR's preleasing is 3.1% ahead of last year at this time, and net rental rates are 1.9% ahead of last year. Those numbers point to future growth and make this stock a good buy.


Equity One

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Equity One ( EQY)

Company Profile: Equity One operates as a a self-managed real estate investment trust based in North Miami Beach, Fla., which mainly acquires, renovates, develops and manages neighborhood and community shopping centers anchored by leading supermarkets, drug stores or discount retail store chains.

Equity One was upgraded to neutral, from underweight. Paolone upped his price target on the stock by $2 to $18.

Equity One "was a significant laggard in 2010 relative to both the strip center and overall REIT groups," noted Paolone.

"In 2011, we think the landscape should be better for EQY. With a significant amount of small shop exposure (particularly in FL), the portfolio has arguably been hit hard in the downturn, but the company finally appears to be gaining some traction on the leasing front, which we expect to carry over into 2011," he added.

"Furthermore, early in the recovery, the company took some heat for making some acquisitions at lower cap rates, but given that cap rates have come in, we think EQY's recent transactions should be viewed as a marginal plus for intermediate-term growth. We also think a growing re-development story should be good for the stock.

Kimco Realty

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Kimco Realty ( KIM)

Company Profile: New Hyde Park, N.Y.-based Kimco Realty Corporation owns and operates neighborhood and community shopping centers.

Kimco Realty was upgraded to neutral, from underweight, and also saw its price target lifted by $2 to $18.

JPMorgan's Paolone said the upgrade was based on four key drivers.

"First, we are generally more constructive on the strip center segment this year relative to last year, as fundamentals have stabilized and begun to improve faster than we previously suspected," he began.

"Second, Kimco has made good progress on the non-core sales front, and the sales are proving to be less of a drag on earnings than we previously anticipated," the analyst went on.

"Third, the continued lease-up of its development pipeline is a marginal plus for 2011 growth, where it (KIM's development pipeline) was a drag during the downturn," he added.

"Lastly, we think the stock's relative valuation seems more attractive today," Paolone concluded.

Brandywine Realty Trust

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Brandywine Realty Trust ( BDN)

Company Profile: Radnor, Pa.-based Brandywine Realty Trust is a self-administered & self-managed real estate investment trust, that provides leasing, property management, development, acquisition and other tenant-related services for a portfolio of office and industrial properties.

Among Paolone's downgrades, Brandywine Realty Trust was given a neutral rating, down from overweight, and its target price was lowered by a dollar to $11.

The analyst attributed the downgrade to his belief that "core Philadelphia and NJ markets will take time to recover, and major tenant losses in the end of 2010 and early 2011 could result in occupancy dips in the near term."

He added that "this ties in with our view that suburban office REITs will have a more protracted recovery than central business district REITs. Two offsets are that acquisitions guided for the second half of 2011 may provide a boost to earnings and valuation remains cheap."

Paolone lowered his price target on Brandywine based on "a discounted cash flow approach to valuation." He assumed a 2% long-term growth rate, 1% to 2% core net operating income growth, plus around 1% external growth coming from acquisitions and other developments.

Brandywine provides leasing, property management, development, acquisition and other tenant-related services for a portfolio of office and industrial properties.

Corporate Office Properties

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Corporate Office Properties ( OFC)

Company Profile: Columbia, Md.-based Corporate Office Properties Trust focuses mainly on strategic customer relationships and specialized tenant requirements in the U.S. Government, defense information technology and data sectors.

Corporate Office Properties was downgraded to neutral, from overweight, and a $2 lower price target at $39.

Paolone conceded that Corporate Office Properties boasts "unique government and defense relationships" which have led to "a development pipeline that should drive above-average growth."

Still "its non-defense suburban office properties have underperformed," leading him to downgrade the office REIT.

"In addition, we expect the fear of government budget cuts having an impact on demand for its core business to continue in 2011," the JPMorgan analyst concluded.

KBW recently highlighted Corporate Office Properties.

OFC underperformed in 2010 and is poised to rebound in 2011, analyst Sheila McGrath predicted. "We believe OFC may have a quarter or two of proving the story after confidence was shaken with lower guidance and slower leasing progress," adding that "with the recent news of cyber attacks on credit card websites, we believe OFC may see a sense of urgency by the government on additional cyber security initiatives.

Nationwide Health Properties

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Nationwide Health Properties ( NHP)

Company Profile: Newport Beach, Calif.-based Nationwide Health Properties invests mainly in senior housing, long-term care properties and medical office buildings.

Paolone downgraded Nationwide Health Properties to neutral, from overweight, and lowered its price target by a dollar to $37.

He said the downgrade reflected his "increasingly constructive posture toward more economically leveraged property types (such as office/industrial/multifamily) that should see core growth rates rebound as the recovery continues to unfold."

"In our view, it could be harder for the stock to outperform our overall coverage universe in this environment," the analyst added.

Paolone did concede that he expects Nationwide Health Properties' business to continue to perform well.

"Core growth continues to be stable, and the company has had success on the capital deployment front in 2010, and we believe this will carry forward into 2011. Additionally, the stock's 5.2% dividend yield should be particularly attractive for income-focused investors," the analyst concluded.

Tanger Factory Outlet Centers

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Tanger Factory Outlet Centers ( SKT)

Company Profile: Greensboro, N.C.-based Tanger Factory Outlet Centers focuses exclusively on developing, acquiring, owning, operating and managing factory outlet shopping centers.

Tanger Factory Outlet Centers got downgraded to neutral, from overweight, but its price target was boosted by $3 to $53.

Paolone downgraded Tanger though conceded that, "from a fundamental standpoint, we remain quite constructive on the story and still expect above-average comp net operating income growth in 2011 and more development headlines to hit the tape over the near term."

He said the downgrade was based on two factors.

"First, as the economy continues to recover, we believe the near-term marginal benefits may be greater for other types of retail that 'lost more' during the downturn," he noted.

The analyst also said valuations screens remain relatively fair.

Paolone then lifted his price target on Tanger citing "a slightly lower discount rate."

Using his 2012 to 2015 adjusted FFO-per-share estimates, he applied a long-term growth rate of 4.75%, reflecting levered core growth and growth from development activities. The target price was reached under the assumption of an 8.5% discount rates, toward the low end of REIT averages.  

Ramco-Gershenson Properties

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Ramco-Gershenson Properties ( RPT)

Company Profile: Ramco-Gershenson Properties Trust, based in Farmington Hills, Mich., is engaged in the business of owning, developing, acquiring, managing and leasing community shopping centers, regional malls and single tenant retail properties.

JPMorgan cut its rating on Ramco-Gershenson to underweight, from neutral, and cut its price target by 50 cents to $11.50.

Paolone said he continues "to like the direction in which management is steering the company and the progress with executing its strategic goals," but expects "the stock to lag our overall coverage universe assuming the economic recovery continues to unfold...particularly relative to stocks in more economically sensitive property-type groups."

The analyst said he had been concerned about Wall Street's 2011 consensus estimates for Ramco-Gershenson, cautioning that they were too high, but much of that overconfidence tapered over the past week as a number of analysts trimmed their expectations.

Even so, Paolone still generally has "a more constructive outlook for the retail stocks that seem to have a unique edge on the external growth front (i.e., developments in lease-up, low costs of capital to spread invest, etc.). On the flipside, for income-focused investors, we continue to believe RPT's roughly 5% dividend yield is safe and attractive."

Ramco-Gershenson Properties was another REIT that recently appeared on TheStreet's list of 10 Top Buy-Rated Real Estate Stocks for 2011.

KBW noted that shopping center REITs largely outperformed the S&P 500 in 2010, and said "RPT has made meaningful improvements to its balance sheet over the past year, reducing leverage to ~55% and debt-to-earnings before interest, taxes, depreciation and amortization to 8.0x. RPT has also taken steps to improve its corporate governance, which we believe warrants a higher valuation premium (smaller discount) than in past years. RPT is attractive on a relative valuation basis, trading at 10.6x our estimated 2011 FFO, or a 25% discount the sector average, and at a 17% discount to our $14 net asset valuation estimate -- which represents the largest discount in the sector. "

Mall vacancy rates are expected to edge up to 11.5% in 2011, before falling back to 11.4% in 2012 and 10.7% in 2013, according to Reis. Those vacancies pressure mall owners' rent growth which is not expected to turn positive until 2012.

HCP

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HCP ( HCP)

Company Profile: Newport Beach, Calif.-based HCP acquires, develops, leases, manages and disposes of healthcare real estate and provides financing to healthcare providers.

Shares of HCP were upgraded to outperform, from neutral, by analysts at Zacks Investment Research.

Analyst Meenu Goyal noted that "we are changing our long-term recommendation for HCP from Neutral to Outperform as we anticipate it to perform well above the broader market."

Goyal said that earnings estimates for HCP have been increased by most analysts over the last month, "driven by its diversified portfolio that provides a hard-to-replicate competitive advantage over its peers."

"The healthcare sector is relatively immune to the downturn in the economy, and provides a steady source of income that insulates the company from short-term market volatility," he added. "However, a large portion of HCP's revenue originates from a few tenants, which exposes it to operator risk. If one of the company's larger tenants runs into financial difficulty, earnings could be negatively affected in the future."

-- Written by Miriam Marcus Reimer in New York.

>To see these stocks in action, visit the 10 Top Buy-Rated Real Estate Stocks portfolio on Stockpickr.

>To contact the writer of this article, click here: Miriam Reimer.

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