Why Did BofA Upgrade 3 Triple-net Lease REITs?

The rating changes in the net lease segment reflects a shift in focus from portfolio quality to growth, which is likely to be key to net lease performance in 2021, according to BofA Securities.

The REIT Analyst: Joshua Dennerlein upgraded the ratings for EPR Properties EPR, Essential Properties Realty Trust Inc EPRT and National Retail Properties, Inc. NNN from Underperform to Buy.

The EPR Properties Thesis: Analyst Dennerlein raised the price target from $26 to $62 in the upgrade note.

“EPR is still trading at a deep discount to our updated net asset value (NAV). Our PO assumes that EPR trades in line with its one year forward NAV,” he wrote.

The Essential Properties Realty Trust Thesis: The price target was raised from $17.50 to $26.50.

“EPRT’s portfolio has fared much better than we expected during the pandemic which was our main concern,” the analyst said.

“Looking ahead, we believe EPRT offers the best growth profile within net lease. The pandemic may accelerate transaction volumes as operators look to grow or shift to a more asset light model,” he added.

The National Retail Properties Thesis: Dennerlein raised the price target from $37 to $54.

Although the company’s initial guidance was better than expected, there seems to be further upside potential, he noted.

“Management is factoring in a 2% rent loss from the current base rent run rate. We believe this is conservative and positions NNN to beat and bump throughout the year,” the analyst wrote.

“We also expect cash collections to continue to improve and NNN to increase their acquisition guidance range from $400-500M. Our model assumes $625M in 2021,” he added.

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