Deutsche Bank analyst John Perry initiated coverage of Retail Properties of America Inc. (NYSE:RPAI) with a "Buy" rating and $10.50 price target, saying the company has attractive internal growth and identifiable catalysts.
The brokerage established its 2012 funds from operations per share estimate of $0.83 and its 2013 estimate of $0.90.
With substantial portfolio upside still ahead and balance sheet repair in its latter stages, Perry thinks RPAI is well-levered to the economic recovery that he expects will continue to accelerate over the coming years.
With retail occupancy at only 88%, the analyst sees above average internal growth over the next few years. He also sees the completion of RPAI's disposition plans in 2012, achievement of its de-leveraging targets, and improving operating metrics as key identifiable catalysts that should drive a narrowing of the significant valuation discount to its peers.
At a retail occupancy rate of only 88% at the end of 1Q-2012, Perry sees above-average upside from the lease-up of RPAI's remaining vacancy. The current leased rate of 90.6% represents roughly $11 million (about 5 cents/share) of additional rent that will commence later in the year.
The analyst sees normalized occupancy in the 93%-94% range, representing an additional $15 million (about 6 cents/share) of rent. Though this will take time to play out, he sees rising occupancy as a key driver of earnings growth over the next few years.
Given that RPAI has not yet fully-addressed its funding needs over the next 2 years, which will require a significant amount of asset sales in 2012, a somewhat higher level of tenant concentration risk than its peers, and more limited external growth opportunities, Perry fully acknowledges that RPAI should trade at some level of discount to its peer group.
However, at a 5 times discount to its peers on a 2013 funds from operations basis and almost 5 times on a funds available for distribution basis, the analyst thinks the discount is too draconian.
Also, the shares are trading at an 8.0% implied cap rate or about 160 basis points higher than the peer median and 30 basis points wider than recent national strip center comps. Combined with a 7.5% dividend yield, Perry's $10.50 price target implies a total shareholder return of about 23%.
RPAI is trading down 0.11% at $9.10 on Tuesday.