Bank of America Upgrades DDR Corp On Valuation & Power Center Strategy

August 10, 2015

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Bank of America Upgrades DDR Corp On Valuation & Power Center Strategy

On August 6, Bank of America/Merrill Lynch analyst Craig Schmidt published a research note upgrading shopping center REIT DDR Corp. (NYSE: DDR) from Neutral to Buy and increased his DDR price target by 5.5 percent.

The DDR management team has been focused on upgrading the quality of its portfolio over the past five years, while growing both its FFO and dividend payout.

Source: DDR Investor Presentation

Schmidt noted, "DDR has reached an inflection point, trading at 14.5x 2016E Price to AFFO multiple, a 32% discount compared to strip average multiple of 21.5x."

Tale Of The Tape – DDR vs Peer Group Past 12 Months

DDR Corp. shopping center peers: Kimco Realty Corp (NYSE: KIM), Regency Centers Corp (NYSE: REG) and Brixmor Property Group Inc (NYSE: BRX) have outperformed the RMZ during the past 12 months.

The MSCI REIT Index (RMZ) is a good proxy for the broader equity REIT sector.

DDR – Puerto Rico Update

Recent headlines regarding Puerto Rico's bond default and general state of the economy may have contributed to a headwind for DDR shares.

Source: DDR Investor Presentation

Approximately 12 percent of DDR's base rents are derived from its Puerto Rico properties, which are updated in the slide above.

Bank of America – DDR: Upgrade Neutral To Buy, Increase PO To $19

The new DDR $19 price objective represents a ~18.4 percent potential upside, based upon a previous close of $16.04; for a total return of 22.8 percent, including DDR's 4.25 percent yield.

The Bank of America $19 PO for DDR is based upon the shares trading at the firm's forward NAV estimate utilizing a 6.75 percent cap rate and $856 million forward NOI estimate.

Power Center Outperformance

DDR is the largest owner of U.S. power centers, which have been outperforming smaller open-air shopping centers. This is largely due to the higher percentage of quality anchor tenants and junior anchors, and fewer small-store tenants.

Notably, power center overall vacancy is a 4.7 percent vs 7.9 percent for all shopping center formats. The DDR anchor space is 98 percent occupied, resulting in an overall portfolio occupancy of 95.5 percent.

The Bank of America report indicates that cap rates for power centers have fallen 200 bps over the past 18 quarters, reflecting investor demand for higher-credit quality. "However, the stock prices are not fully reflecting this, as DDR is trading at a 7.1% implied cap rate versus larger cap strip center peers (BRX, KIM, REG, WRI) at a 6.7%, a spread of 40 bps," according to Schmidt.

DDR Addition By Subtraction

DDR strategic dispositions continue to be greater than acquisitions. However, high occupancy and a five-year 4.4 percent CAGR for base rents, have contributed to DDR's continued FFO growth while culling its portfolio.

Source: DDR Investor Presentation

Schmidt also pointed out, "Most of 2016 should consist of selling JV assets where DDR's ownership is 5-20%, so although the number of centers will continue to decrease, the hit to earnings will be less than what we've seen this past year. In fact, we are modeling modest FFO growth in 2016E."

Source: DDR Investor Presentation

Investor Takeaway

DDR's largest shareholder Alexander Otto joined the board in May after the annual shareholder meeting. Otto has been a major shareholder since 2009, and Bank of America views this as a positive development.

The Bank of America upgrade is primarily based upon valuation, and the belief that the current DDR share price does not fully value its high-quality tenant roster and steadily improving portfolio of assets.

Source: DDR Investor Presentation