Office properties belong to a segment of commercial real estate that has taken a big hit during the pandemic. Their future also looks murky post-pandemic as many organizations find they can save money and space by keeping staff at home, especially given the new safety imperatives that will be in place when they reopen.
That uncertainty reflects in the family of office real estate investment trusts (REITs) as tracked by Nareit. Those 21 companies posted a total return of -8.25% in October alone and a year-to-date total return of -35.97% as of Oct. 31.
While each has its own focus on specific types of markets and buildings -- from traditional office skyscrapers to life science office parks -- they do share one attribute that has withstood the pandemic: Nareit says the dividend yield on those 21 REITs was 4.89% at the end of October.
That's not too shabby. If you're interested in the income stability and capital preservation as much as capital growth, there are some office REITs to consider. The top three in the Nareit list in terms of year-to-date return would be a good place to start.
While it's just one of many factors to consider in making an investment, it does speak to the ability to stay steady during one of the most turbulent times we've seen in investing in many years.
They are Alexandria Real Estate Equities (NYSE: ARE), Corporate Office Properties Trust (NYSE: OFC), and Easterly Government Properties (NYSE: DEA). Alexandria Real Estate Equities, in fact, is the only one of those 21 office REITs with a positive return so far this year, at 5.47%. Corporate Office Properties Trust was second at -0.18% and Easterly Government Properties followed at -1.30%.
Two of these are heavily invested in being a landlord to the federal government and its contractors, while one is big into life sciences, itself a target of much federal and corporate investment that speaks to growth ahead.
Here's a quick look at each.
Alexandria Real Estate Equities
California-based Alexandria Real Estate Equities invests primarily in office space for life science operations that include biotechnology, pharmaceuticals, and device-making and are affiliated with government, medical, nonprofit, and academic institutions.
Alexandria says it pioneered this niche, now primarily hosted on science and technology campuses in urban innovation clusters, shortly before it went public in 1997. Since then, it's posted an average annual return of 13.3% compared to 8.2% for the S&P 500.
The company's stock was yielding 2.58% based on a trading price of $163.97 on Nov. 24 and its third-quarter dividend of $1.06 per share. That puts it on pace to exceed the total dividends of $4.00 per share paid in 2019. With a market cap of $27 billion and $3.9 billion in liquidity, this is by far the largest of the three REITs we're reviewing here, and just returning to its 52-week high of $177.55 per share would get an investment off to a nice gain of 8%.
Alexandria is not resting on its laurels, with 16.2 million square feet of additional space either in development or redevelopment or already under construction to go along with the 31.2 million rental square feet it already has operating in key markets that include Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and North Carolina's Research Triangle.
This accomplished REIT's focus on properties that physically accommodate collaboration among tenants seems to put it in good stead in a research and development environment that is becoming ever more critical.
Corporate Office Properties Trust
Columbia, Maryland-based Corporate Office Properties Trust (COPT) owns, manages, leases, and develops office and data center properties that host government agencies and contractors, especially in the areas of national security, defense, and information technology.
This statement on the company's corporate profile page speaks to the confidence an investor can have in its future: "COPT's Defense/IT locations are aligned with defense installations whose missions remain DoD spending priorities." This kind of tenant seems highly likely to pay the rent, regardless of who's in charge on Pennsylvania Avenue or Capitol Hill.
That stability reflects in COPT's payout performance. The $0.28 per share it declared on Nov. 12 was its 92nd consecutive quarterly dividend and represents a 4.09% yield at a Nov. 24 price of $27.27 per share. COPT's 52-week high of $30.35 is 11.2% higher than that, and again, seems quite attainable for this $3 billion market cap operation.
While COPT is not really diversified -- its 18,273 million square feet of office space are in 167 buildings in Maryland, Virginia, the District of Columbia, Alabama, and Texas -- as long as the national defense remains a big-ticket item (which seems likely), this will be a reliable REIT to consider.
Easterly Government Properties
Easterly Government Properties focuses primarily on the acquisition, development, and management of Class A commercial properties that are leased to the U.S. government either directly or through the U.S. General Services Administration.
Easterly owns 76 operating properties and its latest acquisitions and redevelopments include a 76,112-square-foot FBI field office in Mobile, Alabama, and a 200,000-square-foot FDA facility in Atlanta, respectively.
This $2 billion market cap REIT was trading at $21.60 on Nov. 24 -- giving it a yield of 4.76% based on its third-quarter dividend of $0.26 a share (as it's had since Q4 2017) and a 35% discount from its 52-week high of $29.32.
As with any stock, there's no guarantee it'll get back there, but that does seem to be a reasonable bet, given that Easterly is in the government business and the bureaucracy may well be in line for a spending boost in the new administration. Easterly seems like another safe investment in these stormy seas.
The Millionacres bottom line
These three office REITs benefit both from the steady income that long-term leases yield and from the inherent stability of their tenant base. The fact that their stock prices and yields held steady during the worst of the pandemic plunges only adds to the argument that these are solid long-term plays for investors who might find themselves relying on the income as much as the growth.