Baird Raises Price Targets on High-Yielding Net Lease REITs

March 15, 2019 by Lee Jackson

Despite the threat of higher interest rates for years, the bottom line is that rates have been range-bound for some time. Due to the implications of increased costs for the government debt service if rates go higher, it’s a good bet they stay pretty much where they are now. With the 30-year U.S. Treasury bond yielding a paltry 3.03%, there certainly are better ideas for income investors looking for a degree of safety.

One of those better ideas has been on fire, and given the current economic environment, the sector could continue to trend higher. Net lease real estate investment trusts (REITs) may be offering outstanding growth and income potential for total return investors.

These REITs generally rent properties with long-term leases (10 to 25 years) to high-credit-quality tenants, usually in the retail and restaurant spaces. “Net lease” refers to the triple-net lease structure, whereby tenants pay all expenses related to property management: property taxes, insurance and maintenance.

Baird analysts are very positive on some of the top stocks in the industry and raised price targets as well. These four, including the firm’s top pick, look like outstanding ideas now. All are rated Outperform.

Agree Realty

This top REIT has had a nice run off the December lows and still has potential upside. Agree Realty Corp. (NYSE: ADC) focuses on the ownership, development, acquisition and management of retail properties net leased to national tenants. It specializes in acquiring and developing net lease retail properties for retail tenants.

The company currently owns and operates a portfolio of 663 properties, located in 46 states and containing approximately 11.5 million square feet of gross leasable space. The Baird report noted this:

Our price target is based on shares trading at 23x our 2020 estimated Adjusted Funds From Operations (AFFO) estimate, a 1-turn expansion to the current 2019 multiple. We believe Agree will deliver one of the best AFFO/per share growth rates (on average) in the net lease sector over the next two years.

Investors receive a 3.33% distribution. The Baird price target was lifted to $75 from $71 and compares to the Wall Street consensus target of $70. The shares closed Thursday’s trading at $66.42.

National Retail Properties

This is one of the largest REITs and a solid choice for nervous investors. National Retail Properties Inc. (NYSE: NNN) is a fully integrated REIT that acquires, owns and invests in single-tenant net-lease retail properties.

The company invests primarily in high-quality retail properties subject generally to long-term net leases. As of December 31, 2018, the company owned 2,969 properties in 48 states with a gross leasable area of approximately 30.5 million square feet and a weighted average remaining lease term of 11.5 years.

Baird bases the price target on shares of National Retail trading at 20 times the 2020 AFFO estimate, equal to the current 2019 AFFO multiple, which the firm believes is warranted given the company has ample capital available to execute on its 2018 and 2019 acquisition targets.

Investors receive a 3.77% distribution. The $57 Baird price objective was raised to $58, and the consensus target price is $54.17. Shares closed at $53.43 on Thursday.

VICI Properties

This is the top pick at Baird in the net lease group. VICI Properties Inc. (NYSE: VICI) is a triple net lease REIT that was spun out of Caesars Entertainment post-bankruptcy. It has 20 mixed-use gaming, lodging and entertainment properties in its portfolio, and a subsidiary owns four championship golf courses. VICI also owns roughly 34 acres of undeveloped land in Las Vegas that it leases to Caesars.

VICI reported fourth-quarter results largely in line with estimates and initiated 2019 guidance in line with Wall Street models on an apples-to-apples basis. The analysts feel the company has the strongest growth profile of the gaming REITS, driven by potential real estate dropdowns from Caesars.

Investors receive a 4.66% distribution. Baird lifted its target price to $28 from $27. The consensus estimate is $24.50, and shares closed at $21.42.

W.P. Carey

This is another larger REIT with an incredible distribution for income buyers. W.P. Carey Inc. (NYSE: WPC) ranks among the largest net lease REITs with an enterprise value of approximately $17 billion and a diversified portfolio of operationally-critical commercial real estate that includes 1,163 net lease properties covering approximately 131 million square feet.

For over four decades, the company has invested in high-quality single-tenant industrial, warehouse, office and retail properties subject to long-term leases with built-in rent escalators. Its portfolio is located primarily in the United States and northern and western Europe and is well-diversified by tenant, property type, geographic location and tenant industry.

In February the company reported that profit more than doubled in the fourth-quarter as real-estate sales rose due to additional lease revenues from properties acquired by its CPA:17 merger, as well as other property acquisitions.

Investors receive a 5.53% distribution. Baird’s moved its price target from $77 to $83. The consensus target is $71.66, but shares closed most recently at $77.00.

While these are all solid plays for more conservative accounts, it is important to remember that REIT distributions can contain return of principal. With that noted, these are four of the best in the business.

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