Just when it seemed like people would be returning to their office workplaces in droves, the pandemic came roaring back. Employers big and small are now trying to craft new strategies on the run, changing plans about whether employees will be required to come in some of the time, all of the time, or not at all.
Adding to the uncertainty is whether vaccinations will be required, of course, as well as lots of indicators -- like this poll -- that there are a lot of people who simply won’t come back in. They’ll quit instead.
All this roils the huge office space market in this country, including those real estate investment trusts (REITs) that specialize in office space.
But some office REITs seem better positioned to handle this flux than others. Here are two to consider. One specializes in that most dependable of businesses -- defense with a dash of data -- while the other has a focus on 18-hour markets with a dollop of life sciences.
Corporate Office Properties Trust
Corporate Office Properties Trust (NYSE: OFC) is a Columbia, Maryland-based provider of real estate services -- including a heavy dose of data centers -- to the U.S. government and defense contractors.
COPT’s focus is on buildings and developable land near high-tech and cybersecurity-oriented defense installations, concentrated in the suburbs around the District of Columbia as well as defense-oriented communities like Huntsville, Alabama, and San Antonio, Texas.
As of the second quarter, COPT’s portfolio of 181 properties sported a total market capitalization of $5.3 billion and comprise 21 million square feet, including 6 million square feet dedicated to its 30 data centers. The company also has a portfolio of office properties in the D.C. and Baltimore region that account for about 12% of its rental revenue, with the rest from its defense-oriented tenants.
COPT’s 2Q21 presentation to shareholders highlighted its confidence in the defense sector, noting strong bipartisan support for continuing spending growth while pointing out that the company’s own core portfolio was 94.6% leased, with no office or data center rent relief or deferrals in place this year.
The company also has completed 694,000 square feet of new space so far this year as of July 28, with another 1.8 million square feet in the development pipeline. That gave management confidence enough to increase 2021 full-year guidance for funds from operations (FFO) per share from $2.19-$2.25 to a new range of $2.24-$2.28.
COPT was trading at $28.64 a share midafternoon on Monday, Aug. 9, 6.13% below its 52-week high of $30.51 from July 30 and well off its 52-week low of $21.68 notched last Oct. 29. That’s good for a market cap of $3.2 billion and a respectable yield of 3.84% based on an annual dividend of $1.10 a share.
City Office REIT
City Office REIT (NYSE: CIO) stakes its fortunes on high-quality office properties in 18-hour cities with strong economic fundamentals, including Dallas; Denver; Orlando, Florida; Phoenix; Portland, Oregon; San Diego; Seattle; and Tampa, Florida.
The portfolio for this company -- operated from offices in Vancouver, British Columbia, and Dallas -- currently includes 62 office buildings with about 5.5 million square feet of net rentable area that was 89.7% occupied at the end of the second quarter.
Year-over-year results have been good. In its 2Q21 investor presentation, City Office said adjusted FFO per share jumped from $0.14 in 2Q20 to $0.22 in 2Q21, for instance, enough to cover the $0.15 per share dividend.
City Office also is continuing its move into a particularly promising industry segment: "Also during the quarter, we completed a strategic two-property acquisition in San Diego contiguous with our Sorrento Mesa life science portfolio. Our assemblage of cash-flowing life science assets combined with over 1 million square feet of zoned life science development potential has generated enormous value for the company,” CEO James Farrar said in the company’s 2Q21 earnings announcement. “We are currently advancing alternatives to further maximize value for shareholders."
City Office stock was trading at $13.27 a share mid-afternoon on Monday, Aug. 9, just off its 52-week high of $13.47 from Aug. 6 and more than twice its 52-week low of $6.12 reached last Oct. 29. That’s good for a market cap of $574 million and a healthy yield of 4.52% based on an annual dividend of $0.60 a share.
The Millionacres bottom line
Obviously, the market for office REITs already is challenging, and the delta variant’s surge is not making things any easier. But there does appear to be value to be had in this segment as we head toward an uncertain autumn, and these two REITs seem like particularly good candidates for real estate investors to consider for an August buy.