The analysts at Bank of America Merrill Lynch have come out with three top picks in the real estate investment trust (REIT) segment on Monday. Two of these offer significantly higher dividend yields than their peers, and one offers lower yields. All three were assigned with Buy ratings in the new coverage.
American Realty Capital Properties Inc. (NASDAQ: ARCP) was started with a Buy rating and a $15.50 price target, versus a $12.41 close. The firm likes the valuation here, with shares trading at a 31% discount to its closest peer. American Realty Capital has been addressing investor concerns by deleveraging, selling its multi-tenant retail assets and internalizing management. One concern includes Red Lobster as being 12% of its rents, as well as volatility in its PCM business, growth off a large asset base and integration risk. This comes with an 8% dividend yield as well.
Ashford Hospitality Prime Inc. (NYSE: AHP) is considered by Merrill Lynch to be a prime case of undervalued assets. The firm started coverage at Buy, and it assigned a $19 price target (versus a $16.30 close). Ashford is an externally managed hotel REIT that has a market cap of $555 million and an enterprise value of $1.1 billion. What was liked here is Ashford’s portfolio quality, its favorable operating metrics, as well as an experienced management team. The $19 target implies approximately 12.5 times the firm’s 2015 expected EBITDA, and it is a multiple at a 10% discount to peers. One thing worth noting is that the dividend yield is only 1.2% so far.
Physicians Realty Trust (NYSE: DOC) was also started as Buy with a $14.25 price target. Interestingly enough, this one closed at $13.81, so that seems to not leave much upside. Still, it has a 6.5% yield and only a $291 million market cap. Merrill Lynch is forecasting above-average growth against its peers, as well as the REIT’s focus. Its small size makes growth via acquisitions a meaningfully driver of AFFO growth versus peers. We forecast a 2014 AFFO payout ratio of 103%, below peers. We remain underweight health care within REITs.