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ONE BIG THING

FrontView REIT Gets Initiated At Overweight… From Its Own Underwriters?

Who: FrontView REIT Inc (NYSE: FVR) is a Dallas, Tx-based, internally managed, Diversified REIT that owns 278 outparcel properties (freestanding buildings with direct frontage on highly trafficked roads) of over 2 million square feet across 31 states. FrontView’s top tenants by annualized base rent (ABR) are household names, such as Verizon Communications Inc. (NYSE: VZ), I-HOP, CVS Health Corp (NYSE: CVS), AT&T Inc (NYSE: T) Walgreens Boots Alliance Inc (Nasdaq: WBA) and Wendy’s Co (Nasdaq: WEN). 

And oh yes, it turns out some other tenants include financial institutions such as Bank of America Corp (NYSE: BAC), JPMorgan Chase & Co (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC). More on that soon.

The tenants are long-term with an average remaining lease term of seven years. FrontView has an excellent occupancy rate of approximately 99%. Its diversification across states and industries is a key strength.

What: FrontView REIT began trading on October 2, 2024, and until this week had yet to be covered by analysts. However, that changed on October 28, as JP Morgan, Morgan Stanley and Wells Fargo analysts all initiated coverage on FrontView with Overweight ratings and target prices between $21-$23 per share. Bank Of America then initiated coverage with a Buy rating and a $22 price target.

But is there a conflict of interest?

Why: Morgan Stanley, J.P. Morgan, Wells Fargo Securities and Bank of America Securities served as joint book-running managers for FrontView’s offering. A book-running manager is a lead underwriter or investment bank that manages new securities issues for a client. They are sometimes also called lead arrangers or lead managers.

Book-running managers have several duties, including determining the final offering price. FrontView’s total offering was approximately 14.2 million shares at $19.00 per share, which generated $271.5 million.

According to a filing with the Securities and Exchange Commission (SEC), filed under rule 424b4, Morgan Stanley & Co. LLC bought 4,950,000 shares, J.P. Morgan Securities LLC and Wells Fargo Securities LLC each bought 2,970,000 shares and BofA Securities, Inc. purchased 1,650 shares of common stock.

On October 22, FrontView REIT announced the Underwriters’ exercise of their option to purchase an additional 1,090,846 shares of FrontView common stock.

In addition, as mentioned above, all three major banks are FrontView tenants. Only Morgan Stanley is not. Given the various relationships these banks have with FrontView, one has to wonder about all three coming out with initiations of coverage at Overweight within less than an hour of each other and only 26 days after co-managing its IPO. At least Bank of America made it look a little better by waiting another 4 ½ hours before announcing its initiation of coverage.

The stock closed at $19.44 the previous trading day so price targets set by the three banks represented 8% to 18% gains from that price. FrontView was trading about 0.20% higher shortly after the opening on Monday but subsequently closed down 1.59%. On Thursday morning, it was trading near $19.10.

Takeaway: FrontView REIT has a lot going for it and could become a very successful REIT in the future, so none of this should be taken as criticism against it. But perhaps the same banks that underwrite stock, buy millions of shares and are also tenants of that REIT should not be initiating coverage with Overweight or Buy ratings and higher price targets within hours of each other just a few weeks after co-managing its IPO. Of course, it’s all perfectly legal, but the optics just look so bad.

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WHAT WALL ST. SAID ABOUT REITS THIS WEEK

Alexandria Real Estate Equities Inc (NYSE: ARE): On October 24, RBC Capital Markets analyst Michael Carroll downgraded Alexandria Real Estate from Outperform to Sector Perform and lowered his price target from $130 to $125. Interestingly, Carroll said he likes ARE long-term for the growth of its mega campuses and life science demand. However, in the short term, the analyst noted that tenant move-outs and dilutive asset sales in 2024 could persist into 2025.

Rexford Industrial Realty Inc (NYSE: REXR) On October 25, Scotiabank analyst Greg McGinniss downgraded Rexford Industrial Realty from Sector Outperform to Sector Perform and cut the price target from $55 to $48, citing “modest rent deceleration in the infill SoCal market in the near-term.” McGinniss sees interest rate volatility and the presidential election limiting short-term leasing decisions and tenant demand.

Extra Space Storage Inc (NYSE: EXR) On October 28, Keybanc analyst Todd Thomas reiterated Extra Space Storage at Overweight. The analyst did not change his September price target of $178. Thomas noted, “We expect EXR’s revenue management platform, third-party management business, and external growth strategies (including its structured finance book) to provide additional support.” Barclays analyst Brendan Lynch also maintained an Overweight position on EXR and raised the price target from $188 to $192.

National Storage Affiliates Trust (NYSE: NSA) Keybanc analyst Todd Thomas downgraded National Storage Affiliates Trust from Overweight to Sector Weight, saying, “The challenging environment is likely to pressure occupancy and NOI growth for a more extended period time than previously anticipated.” The analyst expects a lagging performance against NSA’s peers. On the other hand, Brendan Lynch maintained NSA at Equal-Weight and raised the price target from $45 to $46.

CTO Realty Growth Inc (NYSE: CTO) Raymond James analyst RJ Milligan upgraded CTO Realty Growth from Outperform to Strong Buy and raised the price target from $22 to $24. The analyst noted, “We expect to see additional accretive external growth that should continue to push estimates higher.”

FIVE ZINGERS:

Bucking The Trend: New home sales rose 4.1% in September to an annual rate of 738,000 after dropping 2.3% to 709,000 in August. Economists were expecting a 0.5% rise to 720,000. Builders can offer affordability incentives that existing home sellers can’t match.  

But Not So Fast: Those affordability incentives boosted DR Horton Inc’s (NYSE: DHI) closing sale numbers by 3.1% year-over-year but destroyed its revenue by 3.1%. DHI also came up $2 billion short of revenue consensus estimates for 2025 and got whacked by 11%.

Inching Closer: On Thursday, the 10-year treasury bill was up to 4.282, pushing the 30-year mortgage rate APR (interest rate plus closing fees) to 6.88%. Despite mortgage rates nearing 7%, one analyst has upgraded homebuilder Toll Brothers Inc (NYSE: TOL).

WELL Done: On Monday, Welltower Inc reported stellar Q3 earnings and revenue that crushed the consensus estimates and raised its full-year 2024 FFO from $4.13-$4.21 to $4.27-$4.33 vs the $4.19 estimate. Welltower beat the estimates in Q2 as well and has a total return of 62.54% over the last 52 weeks.

Increasing Net Equity: CoreLogic says in Q2 2024, homeowners with a mortgage had net homeowner equity of $17.6 trillion, an increase of 8% year-over-year. High prices continue to keep investors out of the real estate market.