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REIT现实:2020年Q2总结

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REIT现实:2020年Q2总结

 

 The

 REIT

 Reality

 2Q20

 Mega

 Wrap

 #3,

 33

 REIT

 Credit

 Opinion

 Updates

 North America Credit Research 12

 August

 2020

  2Q20 mega wrap #3, 33 REIT credit opinion updates: AMH (OW), BRX (OW), CBL (N), CBRE (N), OFC (OW), DLR (N), DHC (Issuer: UW, Structurally Senior: N), EPR (N), ESS (OW), FRT (N), HR (N), HTA (N), PEAK (Downgrading from OW to N), STAR (Downgrading from OW to N), KIM (Downgrading from OW to N), LSI (OW), CLI (Upgrading from UW to N), NNN (OW), OHI (N), O (N), DOC (OW), REG (OW), SBRA (OW), SVC (Issuer: N, Structurally Senior: UW), SPG (N), STWD (OW), STOR (OW), SKT (N), VTR (OW), VER (Downgrading from OW to N), VNO (N), WELL (OW), and WPC (OW). Yes, we’re tired.  ...and 26 prior 2Q20 updates: Click here for the first edition of this report with the first

 batch

 of

 REIT

 credit

 updates

 (PLD,

 SLG,

 BDN,

 FR,

 ACC) and

 here

 for

 the second edition (21 more updates).  Key

 themes

 from

 the

 recent

 earnings

 reports:

 Sunbelt

 multifamily

 markets outperforming the coasts (see below), rent collection trends improving for non-mall retail landlords (but

 upfront reserves

 to rent

 charge offs were

 common), industrial REITs can still do no wrong (several triple net lease REITs, like VEREIT, continue to invest in the sector), and office tenant rent collection surprisingly resilient. For the mall REITs specifically, how many more retailers will file (Ascena, Tailored Brands, Lord

 &

 Taylor,

 Chico"s,

 to

 name

 the

 recent

 handful)?

 And

 how

 many

 of

 these retailers are worthy of being rescued by their deep pocket landlords? On this latter point, Simon noted that its Brooks Brothers and Lucky investments are anticipated to generate a significant near-term return on the limited capital required (<$50mm for both

 at

 effectively

 ~1x

 forward

 EBITDA).

 Post

 the

 Simon

 call,

 the WSJ

 reported that

 the

 Simon

 venture

 with

 Authentic

 Brands,

 Sparc

 Group,

 increased

 its

 bid

 for Brooks Brothers from $305mm to $325mm to win the deal and that it has committed to

 retain

 125

 of

 200

 stores.

 Meanwhile

 J.

 Crew

 (parent

 company

 Chinos)

 has reopened

 95%

 of

 its

 stores

 after

 securing

 $130mm

 in

 rent

 concessions

 over

 two years (originally plans called for 67 store closings but now only eight are planned, per Commercial Observer).  Issuance

 update ($25.1bn YTD,

 ~$34bn expected for

 the full

 year). YTD US$ HG Core REIT issuance is now ~$25bn, full tally inside. This week we have seen deals from ESS, KIM, HST, and GLPI (we do now count the lodging and gaming REITs with standard REIT covenants as core). Mid-BBB rated Agree Realty (retail triple net lease, low leverage) also

 issued a debut public unsecured deal this week (10yr, +225bp). As we wrote last month, we expected REIT issuance to accelerate post

 the

 expiration

 of

 earnings

 blackouts

 –

 and

 we

 doubt

 we’re

 done

 yet

 before Labor Day.

 The capital markets for REITs

 (and

 most everyone else) remain wide open. REITs will continue to look to pay down revolving credit line balances. We also expect several to look to get in front of remaining 2021 and 2022 maturities as the year progresses (with some even eyeing dates further out the curve). The offset is lower than anticipated acquisition and development funding.  REIT credit performance slowing after a torrid few months: Month to date, the

 US

 Credit

 Research Mark

 Streeter,

 CFA

 AC (1-212)

 834-5086

 mark.streeter@jpmorgan.com

 Ian

 B

 Snyder

 (1-212)

 834-3798

 ian.b.snyder@jpmorgan.com

 J.P.

 Morgan

 Securities

 LLC

  See page 77 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

 www.jpmorganmarkets.com

  broader

 HG

 market

 has

 generated

 a

 total

 return

 of

 0.3%

 and

 an

 excess

 return

 of 0.6%. Our last sector change was an upgrade from Neutral to

 Overweight on May 28.

 Since

 May 28,

 our

 10yr

 REIT

 fitted

 curve

 is

 106bp

 tighter

 while

 the

 broader market

  is

  only

 52bp

  tighter

 (and

  BBBs

 specifically

  63bp

  tighter).

  The

 June performance for REITs, if you do the math, was rather stunning in terms of the snack back. That being said, check this out: since the pandemic was declared (11-Mar-20), our 10yr REIT fitted curve is still 9bp wider while the overall HG market is 58bp tighter (and

 BBBs 63bp

 tighter). REITs

 were

 slow

 to

 sell

 off,

 but

 when

 they did, they sold

 off hard. Similarly,

 the REIT credit recovery kicked in with a lag to the broader

 market

 recovery,

 but

 once

 REITs

 started

 to

 rally

 (albeit

 from

 an

 extreme oversold

 starting

 point),

 the

 sector

 rallied

 hard.

 See

 our

 March

 sector

 downgrade note, here, and our May sector upgrade note, here, for perspective.  Where does this leave us? For now, we remain Overweight: We expected a rather resilient tone from management teams as earnings kicked into high gear (despite the virus uncertainty) – and that has mostly played out. REIT credit valuation, as noted above,

 has

 rallied

 since

 the

 end

 of

 May

 but

 has

 still

 lagged

 materially

 since

 the pandemic declaration. Currently

 our 10yr REIT

 fitted

 curve sits

 at

 182bp, slightly outside of the market BBB 10yr fitted curve (171bp). We typically (as we do now) find value in REIT credit when it trades at or near BBB levels. Post pandemic, and once ratings stabilize and begin to march back higher (and we realize this is NOT a story for 2020…or maybe even 2021), we will focus more on how REITs are trading 71bp cheap to single As (we still think REIT bonds, given covenant protections, are best measured against other A-rated corporate risk). Speaking of covenants… History in the making with the imminent CBL bankruptcy/restructuring: You heard

 this

 from

 us

 before

 –

 never

 in

 the

 history

 of

 the

 modern

 REIT

 era

 (since basically

 1993

 when

 the

 lead

 author

 just

 so

 happened

 to

 begin

 his

 career

 at

 J.P. Morgan) has an equity REIT, in a mainstream property type, for bonds issued with (close to) the standard four major REIT financial covenants (total debt test, secured debt

 test,

 interest

 coverage

 test,

 and

 the

 “holy

 grail”

 maintenance

 unencumbered asset test), defaulted. The pandemic of course is the tipping point for CBL (the most recent forbearance agreements were extended, again, and the 10Q filing will be late as well), but a bond restructuring fate arguably appears

 to us inevitable regardless given mall retail trends. While we may not have to wait another 27 years for another REIT

 to

 suffer

 a

 similar

 fate

 (WPG

 unsecured

 bonds

 are

 trading

 at <$40),

 we

 do think the REIT unsecured bond track record remains stellar regardless. REIT bonds, in our opinion – and despite all the mall noise, remain significantly under-rated vs. the current CMBS methodology. Ratings tracker highlights how the tide has turned: REIT rating actions continue to pour in with the updated positive/negative action ratio sitting at 8:55 YTD (wow, that’s really, really negative for the sector). The positive actions came pre-COVID- 19

 with

 the

 bulk

 of the

 negative

 actions

 post pandemic

 declaration

 coming

 in

 the retail and healthcare sectors. The mortgage REITs have also been either downgraded or moved to negative outlook. Negative rating actions won’t subside until the rent collection picture truly stabilizes. One notable recent positive action was

 the Fitch affirmation of STAR’s at BB- with the outlook revised from stable to positive. The outlook

 revision

 reflects

 Fitch’s

 view that

 STAR’s

 asset

 quality and

 portfolio risk profile have improved over the past year given the continued reduction in exposure to legacy assets, including land assets and NPLs. 

 2

   Recent reports: Please note that we publish commentary on REIT credit in numerous sector specific and team reports. Click on the links below for access to our reports and reference reports from our REIT equity and CMBS research colleagues. If you aren’t receiving any of these reports direct, you perhaps are not on the proper REIT credit, REIT equity, or CMBS distribution lists. Just let us know and we’ll get you added.  J.P. Morgan Global Real Estate Daily News and Research Summary (11-Aug-20) REIT Sector Snapshot (11-Aug-20) The Week Ahead in High Yield (7-Aug-20)

 The Week Ahead in High Grade (6-Aug-20) The REIT Reality (2Q20) Round #2 (4-Aug-20) CMBS Weekly (31-Jul-20) The REIT Reality (2Q20) Round #1 (28-Jul-20) High Grade Analyst Focus List (15-Jul-20) High Yield Analyst Focus List (15-Jul-20) REIT Dividend Tracker (9-Jul-20) HY Coverage Report (9-Jul-20) REIT 1Q20 Covenant Report (30-Jun-20) REIT 1Q20 Operating Comps (30-Jun-20) REIT Detailed Debt Maturities 1Q20 (30-Jun-20) 2020 Mid-Year Outlook (25-Jun-20, see page 40-41 for REITs) REIT Rent Collections (09-Jun-20) REITweek Meeting Notes (05-Jun-20) USD High Grade Coverage and Rating Report: REITs (01-Jun-20) The REIT Reality (1Q20) Round #2/Sector Upgrade (28-May-20, 32 REITs) The REIT Reality (1Q20) Round #1 (13-May-20, 30 REITs) J.P. Morgan Commercial Real Estate Update (17-Apr-20) REITs 2020 Tenancy Handbook (26-Mar-20) REIT Sector Downgrade (19-Mar-20) REIT 2020 Outlook Webcast and Slides (16-Dec-19)

  3

 REIT Bond Issuance 2020 YTD

  Issue

  Date

  Issuer

 Unsecured

 Bonds

 -

 High

 Grade

 (Core)

  Ra

 tings

 at

 Issuance (Moody"s/S&P/Fitch)

  Maturity

  Coupon

 (%)

 Issue Spread

  Size

  ($mm)

 12-Aug-20

 AGREE

 LP

 NR

 /

 BBB

 /

 NR

 1-Oct-30

 2.900%

 225bp

 $350

 11-Aug-20

 GLP

 CAPITAL

 LP

 /

 FIN

 II

 Ba1

  /

  BBB-

  /

  BBB-

 15-Jan-31

 4.000%

 Tap

 $200

 11-Aug-20

 HOST

 HOTELS

 &

 RESORTS

 LP

 Baa3

 /

 BBB-

 /

 BBB-

 15-Sep-30

 3.500%

 300bp

 $600

 10-Aug-20

 KIMCO

 REALTY

 CORP

 Baa1

  /

  BBB+

  /

  BBB+

 1-Mar-28

 1.900%

 155bp

 $400

 10-Aug-20

 ESSEX

 PORTFOLIO

 LP

 Baa1

  /

  BBB+

  /

  BBB+

 15-Jan-31

 1.650%

 118bp

 $300

 10-Aug-20

 ESSEX

 PORTFOLIO

 LP

 Baa1

  /

  ...

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