As the Centers for Disease Control and Prevention (CDC) cites May 11, 2023, as the end of the federal COVID-19 Public Health Emergency and the World Health Organization (WHO) declares the virus to no longer be a global health emergency, it’s easy to forget that it was only a little over three years ago that the world was turned upside down by the emerging pandemic.
The impact on the U.S. stock market was tremendous, and many real estate investment trusts (REITs), especially those in the office sector, would suffer devastating losses. In the span of four weeks, stalwart office REITs such as SL Green Realty Corp. SLG and Boston Properties Inc. BXP fell 60% and 45%, respectively. After a recovery to near pre-COVID levels that took almost two years, the office REITs have once again tumbled to new lows since March 2022.
While these drops have significantly raised dividend yields, income investors need to decide whether these REITs are terrific long-term buys at current levels or if there will be dividend cuts or further declines before the stocks reach their absolute bottoms?
Many analysts have predicted the demise of office leasing as companies have discovered that employees working from home can save firms millions of dollars a year. Many companies have re-leased offices since 2020 but have also downsized the space needed with so many stay-at-home workers.
Employees loved saving time and money by no longer commuting, eating lunch at home instead of in expensive restaurants and not having to put young children into costly daycare. Some were able to buy homes in less expensive rural areas because commuting was no longer an issue.
But lately, many companies have changed their minds. Within the past month, large companies such as Google, Apple Inc. and Microsoft Corp. have all told workers they must come back to the office at least a few days per week. The general consensus is that workers are more productive in the office than at home.
On April 20, the New York City Metropolitan Transportation Authority announced that it surpassed 4 million rides for the first time since March 12, 2020, the day before the city shut down for the pandemic. While the increase in ridership may reflect people feeling safer from contracting illness, it also suggests that more people are returning to the office in the larger cities.
This could be good news for office REITs, which continue to flounder, even as other REIT subsectors like hotel, retail and mortgage REITs regain some stability. But not all office REITs are still suffering. Take a look at three office REITs that have outperformed their peers in recent weeks.
JBG SMITH Properties JBGS is a Bethesda, Maryland-based diversified REIT that owns and operates 18 million square feet of high-quality office, retail and residential properties in Virginia, Maryland and Washington D.C. JBG Smith is a member of the S&P 400.
On May 9, JBG Smith reported its first-quarter operating results. Funds from operations (FFO) of $0.33 was down a penny from the first quarter of 2022. Revenue of $152.96 million beat the estimates of $147.05 million but was 5.56% lower than in the first quarter of 2022. Still, the stock rose after the report was released.
Over the past four weeks, JBG Smith has risen 10.04% and is the leading office REIT during that time. Before the pandemic, JBG Smith was a $38 stock. Its most recent closing price was $15.12.
Peakstone Realty Trust PKST is an El Segundo, California-based diversified REIT that owns and operates single-tenant office and industrial properties. Peakstone Realty’s portfolio has 19 million square feet of space in high-growth markets in 24 states. Its portfolio is 95% leased.
Peakstone Realty launched its initial public offering (IPO) on April 13. The stock soared from $8 to $40.35 in five days. It has since backed off considerably, but over the past four weeks Peakstone Realty is still up 9.89%. Much of that has come over the past four days.
On May 9, Peakstone Realty Trust reported first-quarter operating results with FFO of $0.37 per share.
Investor note: As a new IPO, this stock is extremely volatile and without much history for comparison purposes.
Corporate Office Properties Trust OFC is a Columbia, Maryland-based REIT that owns and manages office and data center properties in locations that support the U.S. government and its contractors in the Washington, D.C., and Baltimore, Maryland, areas. It’s a member of the midcap S&P 400.
On April 27, Corporate Office Properties reported its first-quarter operating results. FFO of $0.59 was up a penny from the first quarter of 2022. Revenue of $151.68 million beat the consensus estimate of $150.14 million and was a 6.61% increase over revenue of $142.28 million in the first quarter of 2022.
In the past four weeks Corporate Office Properties has risen 5.4%. But shares have fallen from $28 to the recent closing price of $24.01 since early February. The stock recently climbed above its 50-day moving average and appears to be stabilizing.
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Despite these gains, Wall Street is still quite negative on office REITs, and Charlie Munger, vice chairman of Berkshire Hathaway Inc. (NYSE: BRK-A) recently warned of a potential crash in the U.S. commercial property market.
It’s important to choose carefully among REITs in the office sector. What is noteworthy about these three office REITs is that they are diversified by also owning retail, industrial and residential properties. They are outperforming other office REITs that aren’t diversified, such as SL Green and Boston Properties.
In February, the office occupancy rate in 10 major U.S. cities averaged 50.1%, but it was the first time the rate had climbed above 50% since the pre-COVID days. However, as of this past week, the occupancy rate was basically the same. Until that rate begins climbing again, most office REITs will are expected to continue to struggle.
SL Green’s dividend yield is presently 15.4%. Its FFO payout ratio is still a moderate 59%, but it has declining revenue and risk of refinancing at higher rates with debt maturities of $2.2 billion before the end of 2024. Five months ago, SL Green cut its dividend from $0.3111 to $0.271. Another cut cannot be ruled out.
Boston Properties has a 7.6% dividend yield which is about double its five-year dividend yield average. It appears to be in better shape as its first quarter FFO and revenue beat the estimates.
With office REITs at such low levels, this could be a terrific opportunity for long-term income investors to pick up shares with higher yields. But for the moment, look to favor the office REITs that have the most diversification and the best occupancy rates, and avoid chasing the REITs that have the highest yields.
Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.
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