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Morgan Stanley Downgrades NNN and STOR on Rising Cost of Capital Headwind

2022.07.13 06:06

Morgan Stanley Downgrades NNN and STOR on Rising Cost of Capital Headwind
Morgan Stanley Downgrades NNN and STOR On Rising Cost of Capital Headwind

Morgan Stanley analyst Ronald Kamdem downgraded National Retail Properties (NYSE:NNN) to Equal-Weight and STORE Capital (NYSE:STOR) to Underweight on Tuesday.

Kamdem told investors in a research note that the rising cost of capital is a headwind to investment spreads and Adjusted Funds From Operations (AFFO) growth.

Stating that there is a tougher road ahead after outperformance, Kamdem wrote: “Triple net REITs are down -3% YTD significantly outperforming the REIT group down -20%. Indeed the discount to the REIT industry has significantly narrowed from nearly -30% during COVID to -7% currently. However, a key pillar of the growth function for triple net REITs is their ability to invest in assets at a cap rate +100-150bps above their cost of capital. A combination of higher equity and debt cost may have a greater than anticipated impact on AFFO growth.”

Speaking about investment spreads, Kamdem wrote they are “under pressure” with “higher rates (10Yr +150bps YTD), wider credit spreads (+60bps YTD) and lower equity prices (-5-20% for STOR, NNN, SRC, BNL) have led to a rapid rise in cost of capital for REITs focused on non-investment grade tenants.”

Kamdem reduced the price target on National Retail Properties to $45 per share and Store Capital to $25 per share. National Retail shares are down 1.8% Tuesday, while Store Capital is trading 1.5% below Monday’s close.

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