Office REITs Are Blasting Higher: Get In Now or Wait?


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Posted Feb 3, 2023

Don’t look now, but office real estate investment trusts (REITs) have become the hottest subsector among REITs this week.

One of last year’s biggest flops are this year’s rebounders in a topsy-turvy market, and this past week, office REITs, one of 2022’s most unloved REIT subsectors, are making a remarkable comeback.

Over the last five days, out of a universe of 152 REITs priced at $5 or more, the top three performers, and six out of the top nine best REITs, were in the office subsector.

What happened to all of the supposed headwinds? Last year it was all about workers demanding stay-at-home jobs, a coming recession that could wipe out businesses and deplete the office occupancy rates and how rising interest rates will destroy earnings.

Many of those fears have apparently waned, and investors are gobbling up high-dividend-yielding office REITs while the getting is good.

The top three performers over the past five days were:

  • SL Green Realty Corp. (NYSE: SLG), the largest office landlord in New York with 33.1 million square feet in 61 buildings, is up 18.17%.
  • Vornado Realty Trust (NYSE: VNO), another large New York City landlord of office properties and street retail, is up 17.97%
  • Hudson Pacific Properties Inc. (NYSE: HPP), a Los Angeles-based office REIT with 55 properties and an emphasis on epicenters of innovation for media and tech companies in California, Washington state and Vancouver, B.C., is up 17.13%.

This is no one-week fluke. Over the past four weeks, SL Green Realty has risen 28.16%, Vornado Realty Trust is up 23.21%, and Hudson Pacific Properties has bolted 28.87% higher.

The chart below shows the six best-performing office REITs over the last five days as well as their four-week performances. Every REIT on this list has produced double-digit gains for both time periods.


To appreciate the difference in performance, compare the above chart with the chart below, which shows the negative total returns (including dividends) of each office REIT for all of 2022.


The question is, has anything really changed with these REITs, or is it just investor perception of their future that is different? Was the decimation of share prices in 2022 just an overreaction, and is the current rebound a return to more normal values?

One factor that is different is that the Federal Reserve is now transitioning from large rate hikes to smaller ones and starting to talk about its expectations for a disinflationary environment in which inflation — and ultimately rate hikes — begins to taper off.

Another factor helping the perception of office REITs is that many large companies have now begun to inform workers that their in-office presence will be required in 2023 for at least a few days per week.

SL Green had already begun to rally, following its announcement of mixed fourth-quarter operating results on Jan. 25. Funds from operations (FFO) of $1.47 was $0.05 lower than the fourth quarter of 2021 and missed analysts’ expectations by a penny. But revenue of $224.8 million beat Wall Street’s estimate of $194.7 million and was well above the $194.6 million in revenue from the fourth quarter of 2021.

Also helping the shares on Jan. 30, was Baird’s announcement of an increase in price target for SL Green from $38 to $43, while maintaining its Neutral rating. But it was the Federal Reserve’s quarter-point rate hike announcement on Feb. 1 that rocketed shares nearly 10% higher.

Brandywine Realty Trust (NYSE: BDN) was another office REIT whose shares bolted higher this week following the release of its fourth-quarter operating results. Funds from operation (FFO) of $0.32 matched analysts’ expectations but was $0.03 worse than the fourth quarter of 2021. Revenue of $128.98 million beat the street’s view by $2.11 and was 2.75% better than the fourth quarter of 2021’s revenue of $125.53 million. Brandywine Realty Trust’s core portfolio was 89.8% occupied and 91% leased.

While these operating results aren’t great, perhaps the big rise in prices following the earnings reports was a relief rally, as Wall Street may have been thinking that some of these office REITs would perform worse than they actually did.

The recent performance of Douglas Emmett Inc. (NYSE: DEI) is even more of a head-scratcher. The Santa Monica, California-based office and apartment REIT with properties in California and Hawaii has had no recent news, and in December, it cut its quarterly dividend from $0.28 to $0.19 per share. But in December, Douglas Emmett also announced a $300 million repurchase program. It’s possible that its recent price rise could have been some repurchases this past week.

By contrast, there was lots of news for Boston Properties Inc. (NYSE: BXP) in the past week. On Jan. 31, Boston Properties reported fourth-quarter FFO of $1.86, up 20% from $1.55 in the fourth quarter of 2021 and 2 cents above street estimates. Revenue of $789.8 million was 8% higher than the $731.06 million in the fourth quarter of 2021 and $15.54 million ahead of expectations.

However, forward guidance on first-quarter 2023 FFO in a range from $1.66 to $1.68 was below the consensus of $1.76, and full-year 2023 FFO guidance of $7.08 to $7.18 was less than the $7.21 consensus and below previous full-year guidance of $7.15 to $7.30.

On Feb. 3, Morgan Stanley analyst Ronald Kamdem raised his price target on Boston Properties from $65 to $68 while maintaining an Equal-weight rating on the shares.

Boston Properties was not the only office REIT to receive recent positive reports from analysts. On Feb. 2, Baird analyst David Rodgers raised the price target on Alexandria Real Estate Equities Inc. (NYSE: ARE), a Pasadena, California-based urban office REIT with an emphasis on life-science properties, from $162 to $174 while maintaining an Outperform rating on its shares.

That same day, JP Morgan analyst Anthony Paolone raised his price target on Alexandria Real Estate Equities from $176 to $177 and maintained an Overweight rating on it.

The tough question for investors now is: Are these gains sustainable? The most likely answer is that pullbacks could be forthcoming for most of these office REITs before prices begin to move up further.

You can see from the chart below that SL Green Realty has now moved into Overbought territory with a 14-period relative strength index (RSI) of 77.35. In addition, the last candlestick on Feb. 2 touched the 200-day moving average at $44.65 before pulling back to finish at $43.97. Further resistance at the 200-day moving average is likely, as an 18% move over five days leaves the stock very over-extended.


But if the past month is any indication of the future performance of the office REIT subsector, it would seem that Wall Street is looking for a strong rebound in 2023.

In the meantime, investors may want to wait for some well-needed retracements for the office REITs before entering positions, or perhaps consider selling cash-covered puts at lower prices to receive income while waiting for the stocks to pull back to more comfortable levels. But dividend yields are still very good for this subsector and will only get better if the stocks pull back a bit more.
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