The Three Best Performing Office REITs So Far In 2024

The majority of Office REITs have performed poorly in 2024. Higher interest rates, inflation and an ongoing work-from-home atmosphere have kept this subsector from making any headway. The numbers bear this out. Among 23 Office REITs, including dividends, 18 have negative total returns and two are just slightly above break even.

Analysts have shunned this subsector for the most part, focusing on the ongoing inflationary headwinds that make it difficult to refinance debt and pointing to decreases in occupancy rates. 

However, even with the deck stacked against them, three Office REITs have demonstrated clear superiority over the rest of the subsector. Take a look at the best of the office REITs thus far in 2024: 

Net Lease Office Properties NLOP is a New York City-based, externally managed office REIT, spun off from WP Carey Inc WPC in 2023. Net Lease was originally given a portfolio of 59 high-quality office properties with 8.7 million square feet. 89% were in the U.S. and the rest in Europe. However, it has since sold off several of its offices and has only 47 properties with 44 in the U.S. and three in Europe. 60% of its annualized base rent (ABR) is from investment-grade tenants and 93.1% of its leases contain rent escalations.

Two of these properties formerly leased to Blue Cross Blue Shield, Inc. were sold last week for gross proceeds of $60.7 million. Net proceeds were used to repay approximately $48 million of secured mortgage and $8 million of mezzanine loans. Another three properties totaling $132 million were sold in early May and used to pay down mortgage and mezzanine loans.

Since its Initial Public Offering on Nov. 2, 2023, Net Lease has more than doubled from its opening price of $12.29. It recently closed at $25.05. On May 30, it was announced that it would be included in the Russell Microcap Index at the end of June, which has helped to boost its price this month. 

Net Lease Office Properties is the clear leader of the Office REIT subsector with a total return of 37.94% year-to-date. Investors have rewarded the REIT for trimming its portfolio and paying off much of its debt. 

SL Green Realty Corp SLG is a New York City-based office REIT and the largest office building landlord in New York. As of March 31, 2024, SL Green Realty held interests in 57 buildings, totaling 32.4 million square feet.

On April 17, SL Green reported its Q1 2024 operating results. FFO of $3.07 easily beat the consensus estimate of $2.16 and was well above $1.53 per share in Q1 2023. Revenue of $187.90 million beat the estimate of $152.20 million and topped Q1 2023 revenue of $245.80 million.

The excellent Q1 results have slowly but surely pushed SL Green’s price higher. Its total return of 26.72% makes it the second leading Office REIT of 2024.

Yet, despite its solid performance, analysts continue to find fault with it. On June 13, Citigroup analyst Nicholas Joseph maintained SL Green with a Sell rating, although he raised the price target from $31 to $37. But this is the same analyst who maintained a Sell rating on SL Green in March 2023 and lowered the price target from $35 to $17. Within two days of that call, SL Green began rallying and has more than tripled in price. 

Analyst Joseph is not alone in his negative view of this leading Office REIT. In April, JP Morgan analyst Anthony Paolone maintained SL Green at Underweight while raising the price target from $43 to $44. SL Green recently closed at $56.97. 

SL Green pays a monthly dividend of $0.25, and the annualized $3.00 dividend yields 5.26%, which helps to maintain its popularity among investors.

Highwoods Properties Inc. HIW is a Raleigh, NC-based office REIT that owns, develops, acquires, leases, and manages properties in the Southern cities of Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Tampa, and Richmond. It was founded in 1978 and had its IPO in 1994.

Highwoods owns 27.6 million square feet of office space, and its occupancy rate was 88.5% as of March 31. Its tenant base is well diversified by industry, and its top 10 tenants include Bank of America, the Federal Government, Met Life, Bridgestone Americas, and PPG Industries. The company also owns about 120 acres of land parcels. 

On April 23, Highwoods Properties reported its first quarter 2024 operating results. FFO of $0.89 per share was in line with analysts' estimates but below its FFO of $0.98 per share in Q1 2023. Revenue of $211.275 million topped the street estimate of $206.784 million but was a small decrease from $212.752 million in Q4 2022.

On May 6, Deutsche Bank analyst Omotayo Okusanya maintained a Buy on Highwoods Properties and raised the price target from $28 to $31. Highwoods recently closed at $25.47. 

Highwoods has the third-best total return among Office REITs, with 13.51%. Investors considering lower interest rates may want to examine these three Office REITs more closely.

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