Monday, Credit Suisse upgraded Equity Residential (EQR) shares to Neutral from Underperform and increased its price target to $33 from $23.
Analyst Rosivach upgraded the stock due to relative value to fixed income and lower relative earnings quality concerns. REITs are now 9% off their December 28 highs while REIT bonds have appreciated over the same period, making the analyst more constructive on some equity names.
The analyst suggests "dipping a toe" into REIT sectors such as apartments that are less likely to have earnings quality deterioration from higher leasing costs or non-cash operating income adjustments, in contrast, office REITs are guiding to greater cash than GAAP NOI declines in 2010.
The analyst has a neutral view on 2010 EQR guidance, earnings will be released February 3, as management has little upside from aggressive forecasts, while earnings pressure could come if the "cash release" from EQR's $638 million balance as of September 30 is slower than expectations. In contrast, the analyst's 2011 FFO estimate is above consensus, perhaps due to development lease up, although he thinks the 2010 guidance will dominate stock performance short term.
At 21 times 2010 AFFO, EQR has a hefty 18% AFFO multiple premium to the sector. However, the analyst thinks the valuation is justified due to a higher growth rate in 2011 and beyond and lower concerns on leasing-related costs that will impact AFFO in other sectors. The analyst's new price target of $33 is based on a 6.2% implied cap rate, after G&A, a slight premium to our coverage universe of 6.5% and at a discount to its apartment peers, who trade at an average cap rate of 5.7%.
Currently, EQR is up $0.59 or 1.84% and trading at $32.64.
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