Office Space: Baird's Top 5 REITs

Baird has released its top five picks in REITs, namely: Hudson Pacific Properties Inc HPP, Kilroy Realty Corp KRC, Franklin Street Properties Corp. FSP, SL Green Realty Corp SLG and Stag Industrial Inc STAG.

The brokerage, which has an Outperform rating on all of these stocks, favors REITs focusing on office, as it believes that is where "real value" resides in real estate.

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“While development in Industrial as well as concentrated, potentially unsustainable land grabs in Data are risks, we simply anticipate better risk/return opportunities in Office — mainly CBD,” analyst David. Rodgers wrote in a note.

Following is a brief overview of the five REIT picks:

Hudson Pacific Properties: $38 PT

“Given the strength in a very tight Silicon Valley Office market, HPP has the potential to drive additional leasing at the nine assets considered in "Lease-up" from the EOP portfolio, which are currently 78.0 percent leased. These assets offer outsized-growth potential in a largely stabilized market,” Rodgers highlighted.

The analyst, who has a price target of $38 on the stock, believes there is little execution risk at Hudson Pacific's development projects during 2017 due to its strong balance sheet.

As development leases commence, Rodgers estimate YE16 net debt/EBITDA to be 6.0x — almost a full turn lower than fellow primary office peers.

Kilroy Realty Corp: $78 PT

“We believe KRC will find success in multi-tenanting the building as our broker contacts confirm there is still solid leasing activity throughout the Bay Area,” Rodgers noted.

Despite lowering guidance by $0.03 at the midpoint concurrent with the second-quarter earnings release, the analyst said the REIT’s increased liquidity, reduced leverage and more moderate exposure to San Francisco should continue to be well received by investors.

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SL Green Realty Corp: $131 PT

SL Green is likely to ink a joint venture partnership for One Vanderbilt by mid-2017, thereby reducing execution risk on the project and lowering leverage at the firm level on the balance sheet.

SL Green has reduced its lease rollover exposure to less than 12 percent of its consolidated portfolio in Manhattan through YE18, thereby limiting its risk given the amount of new construction in the city over the next several years.

“Greater global uncertainty, including the longer term implications of the Brexit vote, will continue to drive capital toward the U.S. and global markets like NYC — in our opinion,” Rodgers continued.

Franklin Street Properties: $15 PT

Acquisitions in Franklin's core markets are expected to boost earnings growth, particularly as the company enters 2018.

“After the planned retirement of Janet Notopoulos leading several individuals to a series of promotions from within the company into more prominent leadership roles, we believe a renewed energy and focus will support a renewed energy on lease-up within the portfolio. Our current estimates reflect occupancy growth of 150–200bps during 2018,” Rodgers said.

Stag Industrial: $26 PT

Shares of Stag have for quite some time traded at a relatively wide valuation discount to the peer set. In addition, Stag's 5.7 percent dividend yield is among the highest on Baird’s coverage list.

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“Currently at 14.9x P/2017 AFFO ratio in comparison to an Industrial median of 21.9x; we take comfort in owning STAG shares as a value and yield opportunity in the event turbulence arises again in the market,” Rodgers highlighted.

The analyst expects Stag to hit its guidance of $350 million–$450 million in acquisitions for the year, leading to accretive FFO growth given $281 million of Industrial assets closed, under contract or in the LOI stage subsequent to quarter-end.

Full ratings data available on Benzinga Pro.