These commercial real estate trusts may benefit from a post-COVID shift away from remote work.
One of the U.S. stock market sectors most heavily affected by the onset of the COVID-19 pandemic was real estate, which is mostly comprised of real estate investment trusts, or REITs. During the panic of March 2020, the U.S. REIT sector fell 22.1% while the S&P 500 fell by roughly half that much, back-tracking 12.4%.
As offices shut down to contain the spread of the virus, workers were forced to work from home en masse. However, now that the worst of the pandemic is over, leading companies like Apple Inc. (ticker: AAPL), Amazon.com Inc. (AMZN) and Goldman Sachs Group Inc. (GS) have started issuing widespread “return to office,” or RTO, mandates for their staff, either on a full-time or hybrid basis.
That being said, a full RTO trend for the economy is yet to fully manifest. According to foot traffic analytics firm Placer.ai, overall nationwide office occupancy remained at 60% of pre-pandemic levels throughout the third and fourth quarters of 2022, and that level held into January of 2023.
“Given the current macro environment of elevated interest rates and the fact that working from home or hybrid has become more acceptable, there could still be more pain ahead for office-focused REITs,” says Sam Boughedda, lead stock market news writer at AskTraders.com.
Still, some signs of increasing office visits are afoot in some busy locales. For instance, unique visitors to offices in New York reached 86% of pre-pandemic levels by January 2023. However, other metropolitan areas like Washington, Denver, Chicago and San Francisco continue to lag.
With the disparity in RTO across locations and the continued desirability of a hybrid work arrangement among many workers, it’s possible that REITs have yet to fully price in an RTO scenario.
Should a nationwide RTO trend play out to pre-pandemic levels or close to them, certain REITs could experience substantial tailwinds in earnings, share price and dividends. Here are six REITs positioned to capitalize on a robust RTO trend:
Alexandria Real Estate Equities Inc. (ARE)
With a current market cap of $27 billion, ARE is one of the bigger office REITs in the market, and currently holds a spot in the S&P 500 index. The REIT owns, operates, develops and leases over 49.7 million square feet of space in major North American metropolitan locations like Boston, San Francisco, New York and Seattle.
The majority of ARE’s tenants are in the pharmaceutical and technology industries, with notable names including Bristol-Myers Squibb Co. (BMY), Meta Platforms Inc. (META), Eli Lilly & Co. (LLY), Uber Technologies Inc. (UBER) and Moderna Inc. (MRNA). ARE recently reported its fourth-quarter 2022 results, declaring a dividend of $1.21 per share for a yield of 3%.
Federal Realty Investment Trust (FRT)
“The return-to-office trend is certainly beneficial for office REITs, but it also has the potential to be beneficial for retail REITs with a heavy presence in central business districts,” says Ermengarde Jabir, senior economist at Moody’s Analytics. With employees coming back, the tenants of retail REITs, such as restaurants, grocery stores and coffee shops, stand to benefit from stronger foot traffic.
A great example of a retail REIT with a heavy presence in commercial districts is FRT, which primarily operates in major coastal markets on both the East and West coasts. The REIT recently beat analyst estimates for its fourth-quarter 2022 revenue, operating income growth and funds-from-operations, or FFO, figures. Currently, FRT pays a dividend yield of 4%.
Boston Properties Inc. (BXP)
When it comes to pure-play office exposure, few REITs do as well as BXP, which as of Dec. 21, 2022, owns or manages 194 properties totaling 54.1 million square feet. The majority of BXP’s portfolio is comprised of what it calls “premier workplaces” situated in six major metropolitan areas: Boston, Los Angeles, New York, San Francisco, Seattle and Washington.
Like many office REITs, BXP benefits from the longer duration of its leases, which translates into more stable revenues. Currently, BXP’s portfolio has a weighted-average lease term of 7.7 years. For the year ending December 2022, BXP executed 5.7 million square feet in leases and reported FFO of $1.2 billion, up from $1 billion the year prior. The REIT pays an above-average dividend yield of 5.7%.
SL Green Realty Corp. (SLG)
REIT investors wishing to bet on a rebound in the New York City office market can invest in SLG, which is currently the largest commercial landlord in Manhattan. The REIT holds interests in 61 buildings spanning 33.1 million square feet of leasable space, covering notable Manhattan sub-markets like Times Square, Midtown West, Grand Central and Penn Station.
As COVID-19 swept through New York, SLG was hit hard, with rising interest rates and inflation in 2022 further hammering the REIT. For its fourth-quarter 2022 results, SLG posted a net loss per share of $1.01, and FFO of $1.47 per share, down from $1.52 in the year-earlier quarter. However, the REIT does pay a high yield of 10%, which could allow risk-seeking investors to lock in a low “yield on cost,” a measure of dividend yield calculated by dividing a stock’s dividend by the price paid for the stock initially.
Vornado Realty Trust (VNO)
Investors looking for a mid-cap REIT pick might like VNO, which currently possesses a market cap of $4 billion. This REIT is fairly volatile, having a five-year monthly beta of 1.3, which is a measure of sensitivity relative to the broader market. Due to COVID-19 and rising interest rates, VNO suffered massive losses in 2020 and 2022 of 40.5% and 46.7%, respectively.
That being said, investors looking for a beaten-down REIT with both office and retail holdings in New York City, Chicago and San Francisco might find VNO ideal. In Manhattan alone, VNO operates 62 office properties totaling 19.9 million square feet and 2.6 million square feet of retail space. VNO also pays an above-average dividend yield of 9.4%.
Kilroy Realty Corp. (KRC)
More and more Silicon Valley tech companies like Apple, Microsoft Corp. (MSFT), Alphabet Inc. (GOOG, GOOGL) and Tesla Inc. (TSLA) are issuing RTO mandates. To capitalize on this rebound, investors could focus on REITs with a West Coast focus. A great example here is KRC, which owns and operates Class A office properties in San Diego, Los Angeles, San Francisco and Seattle.
KRC recently provided guidance for 2023, noting that it expects occupancy to slip to an average of 86.5% to 88% due to large tenants like Amazon moving out from Seattle and other developments that could ding occupancy. However, KRC also noted that its new property in Austin, Texas, is already 71% leased, and its overall portfolio was 92.9% leased at the end of 2022 despite the impacts of COVID. KRC currently pays a dividend yield of 5.7%.
