Office & Industrial REIT Metrics Update 8/26/16 - With Two Upcoming Conference Calls

We will hold our semi-annual Funds Flow Update conference call on 31 August 2016 at 11 AM ET. The invitation is attached. There are a number of moving pieces including positive Japanese retail funds flows and the strength of ETF funds flows relative to weakness in actively managed funds flows.
Also on the schedule is our semi-annual NAV Creation/Destruction Update conference call, which is scheduled for 7 September 2016 at 11AM ET. Again, this invitation is attached.

Pricing as of close 8/26/16

Despite excellent YTD 2016 performance, we continue to like Industrial REITs and have Buy ratings on six of the eight we cover. We expect industrial fundamentals to continue to modestly surprise to the upside and look attractive relative to other property sectors.

Despite recent positive performance following 2Q16 earnings calls, we continue to favor Gateway City office REITs including Vornado (VNO, Buy, $102.24), SL Green (SLG, Buy, $115.52), Empire State Realty Trust (ESRT, Buy, $20.98), and Kilroy Realty (KRC, Buy, $70.26) due to a combination of fundamentals, real value-add platforms and attractive valuations relative to suburban or low barrier office REITs, which are often (but not always) encumbered by weak fundamentals and a pension fund advisor type, generic platform.

Along with the two invitations to our aforementioned conference calls, the most recently updated Office and Industrial REIT valuation metrics are attached as Exhibits.

Below, we have our 2Q16 Earnings wires for each company under coverage (in chronological order from most recent reporter to first reporter):

Lexington Realty Trust (LXP, Hold, $10.79) - Since the February 2016 bottom, LXP has performed nicely as a yield play rose amongst the thorns. 400 Meter Sprint. Maneuvering the Curves Easily. Maintain Hold.

Vornado - VNO continues to be a complicated story but there have been additional steps toward increased transparency 26.2 Mile Marathon or 10K Open Water Swim? Glory for Those Who Finish. Maintain Buy. We also adjusted our Price Target shortly after earnings seasons came to a close: Post Earnings Season Price Target Adjustment Up to $115/sh. Maintain Buy.

DCT Industrial (DCT, Buy, $48.72) - Continued success for our friends out in Denver who continue to be the bell cow of pure play, domestic industrial REITs. Continuing To Make it Look Easy; Adjusting Estimates; Increasing NAV; Buy and Rhythmic Gymnastics and Trampoline. Target Price up to $52/sh. Maintain Buy.

Piedmont Office Realty Trust (PDM, Sell, $21.45) - PDM continues to exit non-core markets slowly, but surely, and it seems the Street has taken kindly to this strategy. Race Walking. 50 Kilometer Walk. Maintain Sell.

Rexford Industrial Realty (REXR, Buy, $22.06) - As the only industrial REIT completely focused on the SoCal market, Rexford continues to succeed with their single-market focus. Sailing - Keeping the Rexford Yacht North of the Equator. Maintain Buy. TP Up to $24.50. Rexford also recently announced a preferred equity offering: Rugby Returns to the Olympics. Preferred Shares Returning to the REIT Capital Stack. Buy.

Douglas Emmett (DEI, Sell, $36.98) - Staying with the southern California theme, we think the West L.A. and SoCal office markets are solid, but we still have questions regarding DEI. Beach Volleyball. What Else? Maintain Sell.

Highwoods Properties (HIW, Hold, $52.93) - With one of the top management teams in REITland, HIW has been one of the top-performing office REITs of 2016 (up 24.7% vs. 14.0% for the RMS YTD in 2016). Weightlifting; Heavy Lifting Looking Easy; Maintain Hold

Armada-Hoffler Properties (AHH, Buy, $13.92) - The strategy is expanding, the portfolio is transitioning and the crew from Virginia Beach continue to be the Teflon dons in an environment that has gravitated towards yield plays. Cycling in the Velodrome. Maintain Buy. TP Increased to $15.50/sh.

First Industrial Realty Trust (FR, Buy, $28.58) - With new CEO Peter E. Baccile coming in, Mr. Duncan rides off into the sunset on a high note. Cruising Through the Preliminary Heats. Increasing TP to $32/sh. Buy.

Duke Realty Trust (DRE, Buy, $27.91) - DRE has risen up the ranks to become one of the top-performing industrial REITs YTD at 36.0% vs. 14.0% for the RMS. Decathlon Continues. More Delevering. Target Price up to $30/Sh. Maintain Buy.

Equity Commonwealth (EQC, Hold, $30.63) - Sooner rather than later EQC will have some serious decisions to make regarding the portfolio they want to own in the long term. Javelin Throw? Javelin Catch? Hold.

Corporate Office Properties Trust (OFC, Hold, $28.83) - OFC has recovered some of their early 2016 momentum in the dog days of summer. Multiple Games at the Olympic Games. Maintain Hold.

First Potomac Realty Trust (FPO, Sell, $10.08) - FPO still has many obstacles to hurdle, but the re-shaping of the portfolio and strategy has certainly begun. Gymnastics. Perfect 10? Or Really A 9? Maintain Sell.

Terreno Realty Trust (TRNO, Buy, $26.87) - Although TRNO has been the industrial laggard under coverage, we still believe no new supply and declining inventory is a good thing. Open Water Swim. Finally Swimming with the Cost of Capital Current. Maintain Buy.

Washington Real Estate Trust (WRE, Hold, $32.65) - We recently hosted the WRE management team to some investor meetings, here are our take-aways: Maryland Athletes Win Twenty Olympic Medals While WRE Happy to Exit Maryland Office Market. NDR Recap. Hold. The strategy is being endorsed by investors and WRE is an excellent Washington, D.C. proxy, in our view. Sweltering Summer. Coolly Rowing on the Potomac. Eight Man Boat. Maintain Hold.

Empire State Realty Trust - PSA: Please stop asking about the observatory. Take a look at some of the rental rates. New Olympic Sport - ESB Stair Climb. Lease Economics Rival Stair Slope. TP Increase to $23/sh. Buy.

Parkway Properties (PKY, Hold, $17.47) - Until additional information is provided in the coming weeks on the merger-spin with Cousins Properties (CUZ, Hold, $10.73), there shouldn't be many catalysts. PKY: Synchronized Swimming. Teammates Include Cousins Properties and Oil Market. Hold. CUZ: Synchronized Diving. Synchronized to Parkway and Oil Prices. Maintain Hold. A look at our initial valuation on the merger spin-off from PKY's view: Smart and Expensive? Expensive, but Smart? Isolate Houston Purgatory. Hold.

Boston Properties (BXP, Buy, $140.49) - BXP sticks to what they are great at: 1) Strong development pipeline and 2) great submarket recognition. Michael Phelps & the U.S. Swim Team. 2Q16 Earnings Analysis. Maintain Buy.

Franklin Street Properties (FSP, Hold, $12.77) - FSP is very much a dividend-yield name with low cost debt helping maintain FFO. Archery. Gradual Leveraging Up Keeps Valuation Metrics Static. Hold. FSP also recently announced an equity offering in conjunction with their acquisition of Pershing Park Plaza in Atlanta, GA as well as to fund some of the redevelopment at 801 Marquette Avenue in Minneapolis, MN. Long Jumping to Lower Leverage. Smart Equity Raise. Hold.

Kilroy Realty Trust - Even with "tech bubble" headline risk, KRC is doing too good a job to be on the sidelines. 10,000 Meter Run with Usain Bolt Leasing Expectations. Maintain Buy.

Liberty Property Trust (LPT, Hold, $40.52) - A dividend cut at a time when the incremental generalist investor is snooping around for yield plays has slowed the 2016 run-up of LPT. IOC Intervenes. Dividend Cut. More Involvement Needed. Maintain Hold.