Office REITs Benefit As Work From Offices Increases-Can It Continue?

Michael Burry of "The Big Short" fame says Goodbye to Hollywood

November 21, 2024

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Happy Thursday! The week began on a dour note after Fed Chairman Jerome Powell said the Fed is in no hurry to lower interest rates and continued to struggle on Tuesday after Ukraine hit Russia with U.S.-made weapons, and Vladimir Putin lowered the conditions in which Russia would consider using nuclear weapons.

Walmart Inc (NYSE: WMT) and Nvidia Corp (Nasdaq: NVDA) released excellent earnings reports, but the street was disappointed that the latter’s revenue was only up 94% year-over-year. Imagine that? Nvidia fell over 4% after-market after the earnings announcement, then traded higher after the opening bell, but was 1.5% lower Thursday morning. And I thought Great Expectations was only a novel by that Charles Dickens guy.

But tech’s struggles were REITs’ gain this week as investors looked to safer havens. Retail and a few healthcare REITs were especially strong, while office REITs pulled back after last week’s positive showing. The benchmark Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) was up 1.72% on Thursday morning and about 70% of all REITs gained this week.

In this issue, a look at how office REITs are doing as more companies mandate working from the office, what Wall Street said about REITs this week and The Big Short guy says enough is enough and sells144,000+ shares of this REIT.

—Ethan Roberts

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ONE BIG THING

Office REITs Benefit As Work From Offices Increases-Can It Continue?

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What: Many office REITs have performed well since February of this year as the number of U.S. companies mandating office attendance from their employees has increased. Flex Index notes that In the third quarter of 2024, the number of companies requiring a full 5-day office work was up to 33%, a 31% increase from Q2 2024.

38% of U.S. Companies now have a structured hybrid model, and 89% of the hybrids require 2-3 days per week in the office. Large companies with over 25,000 employees are the most likely to have a structured hybrid model. Yet large companies such as Amazon.com Inc (Nasdaq: AMZN), Walt Disney Co (NYSE: DIS) and Salesforce Inc (NYSE: CRM) have recently been pushing for employees to be in the office for at least four of the five days. Amazon announced in September that all employees must return to the office five days a week as of January. CEO Andy Jassy told employees that “teams tend to be better connected to one another” with everyone in the office.

Why: To sweeten the increased mandates, many companies now offer perks to their workers like never before. Some offices now sport outdoor decks, top-quality restaurants and gyms. Investors are finding discounted prices on some offices and scooping them up.

Who: Office REITs such as SL Green Realty Corp (NYSE: SLG), Vornado Realty Trust (NYSE: VNO) and Highwoods Properties Inc (NYSE: HIW) have terrific returns in 2024, while others such as Hudson Pacific Properties Inc (NYSE: HPP) and Office Properties Income Trust (Nasdaq: OPI) have languished. Since February 1, SL Green is up about 76%, Vornado is 53% higher and Highwoods has risen 39%. But Office Properties is down 69% and Hudson has seen a 61% decline. Location is a key reason for the performance dichotomy among the winners and losers.

Office mandates are more prevalent in the South with Knoxville, TN and Greensboro, NC leading the list of cities where office attendance is required. Companies with the greatest work venue flexibility can be found in San Jose and San Francisco, CA.

Takeaway: So what does this mean for office REITs going forward? Well, a few caveats must be mentioned first. Although the recent occupancy rate for all offices nationwide is about 86.2%, it’s still well below the fourth quarter 2019 occupancy rate of 90.6%. And much of the 209 million square feet of office space vacated in Q2 2020 is now considered obsolete and unfilled. Data provider, Trepp reports the number of delinquent office loans in September 2024 rose to 8.36%, the highest rate since November 2013.

The most probable outcome is that quality office REITs like SL Green and Highwoods, whose Price/FFO are still below 10 will continue to perform well. Vornado, with a Price/FFO of 18.50 is a bit more suspect and has probably reached its ceiling near the low $40’s. Hudson Pacific has slumped from $9.00 to $3.15 per share and just had 1.4 million shares dumped by Scion Asset Management (see story in “5 Zingers”). OPI is….well, just about the worst performing REIT on the planet.

Always look for the leaders….in any economic climate.

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WHAT WALL ST. SAID ABOUT REITS THIS WEEK

Alexandria Real Estate Equities Inc (NYSE: ARE) On November 15, Deutsche Bank Research analyst Omotayo Okusanya downgraded Alexandria Real Estate from Buy to Hold, saying he is becoming increasingly cautious about the earnings growth outlook into next year. Okusanya cited the already expected tenant move-outs between now and the end of the first quarter of 2025, putting pressure on occupancy. Another negative factor is the $1.2 billion asset disposition that will occur, reducing earnings in the near term.

The only question is whether these factors have already been priced into the shares, which have fallen from $128 to $105 since last summer.

Diamondrock Hospitality Co (NYSE: DRH) On November 15, Evercore ISI Group analyst Duane Pfennigwerth downgraded DiamondRock from Outperform to In Line and kept the price target at $10.50. The analyst noted that DiamondRock’s increased focus on capital discipline is a positive and he may revisit the shares as more capital recycling opportunities come about. On the same day, Diamondrock announced it has acquired the fee simple interest in the AC Hotel Minneapolis Downtown, a 245-room hotel built in 2016, for $30 million.

Brixmor Property Group Inc (NYSE: BRX) On November 15, Truist analyst Ki Bin Kim held steady on the firm’s Buy rating on Brixmor and noted that Brixmor should be able to grow FFO by 5% this next year which should be sustainable over the next few years. The analyst feels that Brixmor’s retail leasing operation is stronger after several years of changes to its portfolio. The analyst raised the price target from $28 to $31.

Independence Realty Trust (NYSE: IRT) On November 15, BMO Capital Analyst John Kim upgraded residential REIT, Independence Realty from Underperform to Market Perform and raised the price target from $19 to $21. The analyst pointed to data showing that Sunbelt markets are expected to see the best rental growth in 2025. Independence has 74% of its apartment portfolio in Sunbelt regions.

IvenTrust Properties Inc (NYSE: IVT) On November 19, Jefferies analyst Michael Prew initiated InvenTrust with a Hold rating and assigned a $33 price target. Prew noted that IvenTrust’s Sunbelt, grocery-anchored portfolio is helping it grow earnings, but the present premium multiple means its valuation seems full. IVT is up over 20% in 2024 and trades near its 52-week high of $31.37.

Gaming and Leisure Properties Inc (Nasdaq: GLPI) On November 20, Deutsche Bank analyst Carlo Santarelli upgraded Gaming and Leisure Properties from Hold to Buy and raised the price target from $49 to $54. The analyst sees GLPI as having a healthy pipeline, a well-positioned balance sheet, strong tenant coverage and positive valuation leading the way into next year.

FIVE ZINGERS:

No Stopping These Guys: On November 18, Invitation Homes Inc (NYSE: INVH), recently fined $48 million by the FTC for unfair business practices, announced a $200 million joint venture with an unnamed partner to build new home rental communities. $50 million will come from Invitation Homes and the remainder from the partner, with a possible increase in the future. The partner will also provide various management services for a fee in the newly built communities.

Say Goodbye To Hollywood: On November 14, “The Big Short” famed Michael Burry and his Scion Asset Management, sold all of its 144,435 shares of Hudson Pacific Properties Inc (NYSE: HPP) to redeploy capital into other stocks. Hudson Pacific, which owns several Hollywood movie studios, has had notable problems over the past two years, including the long strike of Hollywood screen actors and writers. HPP shares were floundering near $3.15 on Thursday morning.

Give Credit Where Credit Is Due: On November 18, VICI Properties Inc (NYSE: VICI) announced that Moody’s had upgraded VICI’s credit rating from “Ba1” to “Baa3” with a stable outlook. One large Australian bank has been picking up shares of VICI recently.

Take It Back! On November 18, MCB Real Estate announced it was taking back its offer to acquire Whitestone REIT (NYSE: WSR) for $15 per share all-cash and sent a heated letter to Whitestone’s Board of Directors. MCB wrote, “We are disappointed and disturbed at the Board’s intransigence, entrenchment and apparent self-interest.” Whitestone’s Board had rejected the $15 per share offer. WSR was trading near $14.55 on Thursday.

What’s In A Name? On November 20, Great Ajax Corp (NYSE: AJX) announced it would complete its name rebranding to Rithm Property Trust Inc with RPT as its new NYSE symbol, on December 2, 2024. In June, Great Ajax completed a management agreement with global asset manager Rithm Capital Corp (NYSE: RITM) for Rithm to become Ajax’s external manager. Over the past three years, Great Ajax shares have fallen from $10.25 to $3.00, so this name change sounds like “throw it up against the wall and see if it sticks.”

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