Office REITs, or real estate investment trusts, have had a tough year. The average one has produced a total return of negative 19.9% in 2020. Weighing on the sector are concerns that office occupancy and rental rates could be under pressure in the future as more companies allow their employees to work from home even after the pandemic ends.
However, while the market has concerns about the future of the office, REITs focused on the sector are growing increasingly confident. Two that appear well-positioned to rebound in the coming quarters are SL Green Realty (NYSE: SLG) and Hudson Pacific Properties (NYSE: HPP). That upside potential makes them ideal office REITs to buy right now.
A vote of confidence
Shares of SL Green Realty, Manhattan's leading office landlord, have lost about 33% of their value this year. The main factor weighing on the company is the impact the pandemic has had on that city.
However, the REIT has navigated the downturn reasonably well. It generated $443.6 million, or $5.54 per share, of funds from operations (FFO) through the third quarter, as income from a legal settlement offset some losses and reserves on its debt and preferred equity investments. While that's lower than last year's total on an absolute basis ($458.1 million), it's higher on a per-share basis ($5.25) due to its repurchase program.
SL Green has been able to repurchase shares thanks to its success in selling assets. It achieved its plan to raise $1 billion in cash in June, which was ahead of schedule. Meanwhile, it's on track to further bolster its financial resources after agreeing to sell 410 Tenth Avenue for $952.5 million in November, a redevelopment project anchored by Amazon (NASDAQ: AMZN). That deal will enable it to lock in what it calls "extraordinary profits," giving it the cash to repay debt and repurchase stock.
Combine those asset sales with its leasing and financing successes, and SL Green has increasing confidence in its future. Because of that, the REIT recently boosted its monthly dividend by 2.8%, pushing the yield to 5.9%. The company also plans to pay a special dividend to investors and added $500 million to its share repurchase program. These factors make it an increasingly attractive office REIT for income-seeking investors.
Boosting its exposure to these high-value tenants
West Coast-focused office landlord Hudson Pacific Properties has lost nearly 32% of its value this year. Weighing on the REIT is the concern that tech companies won't need as much office space in the future because their employees are more adept at working remotely than those in other sectors.
However, its results don't seem to bear this out. The REIT collected 97% of third-quarter rents. Further, it noted leasing activity accelerated during the period, highlighted by a new lease and expansion with Google (NASDAQ: GOOG). Overall, new leases are coming in 25% above prior rates.
Meanwhile, Hudson Pacific Properties has had lots of success in enhancing its portfolio. It formed a joint venture with private equity giant Blackstone Group (NYSE: BX) around its studio and office properties in Hollywood. The deal enabled it to cash in on assets that count Netflix (NASDAQ: NFLX) as the largest tenant while providing it with a funding partner for future growth. The partners recently received approval for their master plan, which could enable them to build out another half-million square feet of space.
The company also recently formed a joint venture with Canada Pension Plan Investment Board to buy an office tower in Seattle for $625 million. The building is 98% leased, with Amazon as the largest tenant as the e-commerce giant occupies a majority of the building. With that deal, Amazon will become one of the largest tenants within the REIT's office portfolio. By focusing on fast-growing, top-tier tech giants, Hudson Pacific should continue generating steady rental income to support its 3.9%-yielding dividend.
Exiting in a better position than they entered
The COVID-19 outbreak forced companies to work remotely, raising concerns this arrangement would become permanent post-pandemic. However, that seems unlikely because many companies have found it's nearly impossible to innovate, mentor, and build a corporate culture remotely. Because of that, most can't wait to get back to in-person work, which seems increasingly likely to happen again in 2021, thanks to a string of recent positive vaccine data. Add that catalyst to the moves SL Green and Hudson Pacific made this year to enhance their businesses, and both seem like great buys right now, since they trade at much lower prices.