Kilroy Realty Corp (KRC) and Essex Property Trust (ESS) enjoy better fundamentals that many of their REIT peers thanks to their increased exposure to California, presenting investors with opportunities interested in real estate investment trusts, says Anthony Paolone, Senior Analyst at J.P. Morgan.
“Our top ideas this year have been Kilroy in the office business, mainly because of its exposure to northern California, which is a very strong office market, and also because it was very early in building a large development pipeline with attractive returns. There is a lot of value creation that we see accruing to shareholders over the next two or three years as those projects reach fruition,” Paolone said.
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Paolone says the REITs exposure to the West Coast serve the double function of limited exposure to East Coast headwinds, and a REIT like ESS further benefits thanks to the more favorable apartment business conditions in the Pacific Coast.
“We’ve liked Essex in the apartment business, because it’s 100% West Coast-focused, which has very strong fundamentals. Within the context of the apartment business, we think that the name will be more insulated from a lot of the supply that is impacting the East Coast, such as in Washington, D.C., and that metro, where most apartment REITs have sizable exposures, so as we look out the next couple of years, not having exposure to D.C. should help provide Essex with an above-average same-store growth profile,” Paolone said.