Recommendation: Real Estate and High Barrier-to-entry Markets Essay

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Recommendation

This report rates Regency as a HOLD at a current market price of $65.39 as of May 18, 2015.
This report’s recommendation is based on a projected FFO of $2.94 per share and the current FFO multiple of 22.50 in 2014. These forecasts are compared to the current FFO multiple and projected FFO growth of Regency’s peers in 2014 as presented in Exhibit 1. Exhibit 1 indicates that the market is valuing Regency’s estimated FFO growth at a premium relative to its peers. Regency’s portfolio located in high barrier-to-entry markets and low leverage should command a premium relative to its peers.
In addition, Regency’s stock is forecast to trade at a discount of (1.91%) to NAV in 2014, which is significantly less the average premium REITs have historically traded at. Regency’s NAV forecast assumes a 5.75% capitalization rate, which is below the projected retail sector average of 7.10%. However, this is reasonable given Regency’s portfolio of properties in high barrier-to-entry markets.
Exhibit 1: Summary of Recommendation 5/18/2015 2015

2016
Current Stock Price (5/18/2015)
$65.39

Stock Price EOY 2015, Estimated
$66.60

2015 Estimated Target Price
$66.60

2016 Estimated Target Price
$68.59
Multiple
22.50

Multiple
20.50
Estimated 2015 FFO per Share
$2.96

Estimated 2016 FFO per Share
$3.19
2014 FFO per Share
$2.90

Estimated 2015 FFO per Share
$2.96
Estimated 2015 FFO Growth
2.07%

Estimated 2016 FFO Growth
7.77%

Appreciation/(Depreciation)
1.85%

Appreciation/(Depreciation)
2.99%
Dividend Yield
3.63%

Dividend Yield
3.53%
Current Stock Price (5/18/2015)
$65.39

EOY 2015 Stock Price (Estimated)
$68.22

Total Return, Estimated
5.48%

Total Return, Estimated
6.52%

Current Decision (5/18/2015)

EOY 2015 Decision Long-Term Average Return
13.00%

Long-Term Average Return
13.00%
Buy Below
$60.89

Buy Below
$62.66
Sell Above
$66.60

Sell Above
$68.59
Source: SNL Financial and Analyst Estimates

The 2015 target price of $66.60 considers Regency’s current FFO multiple and estimated FFO growth shown in Exhibit 1. The buy below price is calculated by reducing the target price by 13.0%, the long-term average return of REITs, less the current dividend yield. The sell above price is this report’s target stock price for 2015.
The 2016 target price of $68.59 considers Regency’s current FFO multiple, and the estimated 2016 FFO growth shown in Exhibit 1. The buy below price is calculated by reducing the target price by 13.0%, the long-term average return of REITs, less the current dividend yield. The
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