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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.
