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Stifel: Geopolitical Uncertainty, Interest In Hard Assets Are Positives For REITs

Jayson Derrick

The overall macro environment continues to improve, which bodes well for a select group of REITs, according to Stifel.

The Analyst

Stifel's John Guinee made the following rating changes to REIT stocks under coverage:

Highwoods Properties Inc (NYSE: HIW) upgraded from Hold to Buy with a price target lifted from $46 to $53.

Eastgroup Properties Inc (NYSE: EGP) upgraded from Hold to Buy with a price target lifted from $93 to $103.

Franklin Street Properties Corp. (NYSE: FSP) upgraded from Sell to Hold with a price target lifted from $6.50 to $8.

The Thesis

The case for being bullish on American REITs is threefold, Guinee said. (See the analyst's track record here.) 

  • Geopolitical uncertainty in parts of Europe including Italy could help REITs obtain lower interest rates and create a "risk-off investment mentality."
  • Interest in hard asset real estate has "never been stronger."
  • Global capital is "making its way to calmer ports."

Highwoods Properties

  • Highwoods' 86-percent Atlanta portfolio occupancy rate could "easily" be raised, as a large portion of its assets are in high-quality Buckhead assets, Guinee said. 
  • The stock is trading at an attractive real estate valuation of 6.7 percent, 4.5 percent and 3.9 percent, respectively, on net operating income, cash flow and cash flow less G&A Cap Rates.
  • The TEV/unit stands at $253/unit versus the analyst's estimate of $311 per unit.
  • The stock is trading at a "reasonable" funds from operations and stretched funds available for distribution multiple of 13.9x and 27.5x on 2019 FFO/FAD estimates.

EastGroup Properties

  • EastGroup is trading at a "fair" real estate valuation of 4.8 percent, 4 percent and 3.6 percent, respectively, on NOI, cash flow and CF less G&A Cap Rates.
  • The total enterprise value/unit of $111/unit is "acceptable" versus the analyst's estimate of $311 per unit.
  • The stock is trading at 20.4x/26.8x on the analyst's 2018 FFO/FAD estimates.

Franklin Street Properties

  • Franklin Street is at a "very attractive" real estate valuation of 8.7 percent, 6.2 percent and 5.4 percent, respectively, on NOI, cash flow and CF less G&A Cap Rates.
  • The TEV/unit of $182/unit is "very reasonable" versus the analyst's estimate of $358 per unit.
  • The stock is trading at a "reasonable" 8.1x/13.1x multiple on the analyst's 2018 FFO/FAD estimates.

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