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Office REIT Outlook May Have Lower Earnings Growth in 2018

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A recent office REIT report put out by analyst firm BTIG says that the office sector at the beginning of 2018 was best summarized as “Wait for 2019.” A combination of higher than expected asset sales (primarily to fund new developments), large lease expirations, and extended development stabilizations, effectively pushed FFO growth into 2019, the report said.

Therefore, the firm updated its estimates following 4Q17 earnings and now project 6.9% FFO growth in 2019 vs. 0.6% in 2018. “Our key questions for the remainder of 2018 are: (1) which companies can generate above average growth in 2018, (2) could we see further FFO/sh erosion in 2018, and (3) could rising interest rates offset strong expected growth in 2019,” the report said.

The BTIG report said that they see limited downside risk to 2018 estimates but recycling could hurt 2019. “If companies need to sell assets to fund future development spending, BTIG could see earnings erosion in 2019, similar to 2018, the report says.

“We have our eye on Kilroy Realty and Hudson Pacific as two firms with the most development funding needs.”

As for who the firm is maintaining “buy” ratings for? Alexandria, Empire State Realty, Hudson Pacific, Kilroy Realty and SL Green top the list. BTIG also maintained its “buy” rating on Corporate Office Properties Trust, but adjusted its price target from $38 to $31 to reflect lower REIT multiples.

Check back with The REIT Wire as we cover more about office REITs and BTIG’s insights once Q1 numbers come out in the next month or so.