Investors have taken a sell-first-and-ask-questions-later approach to office real estate investment trusts (REITs) this year, driven by concerns that work from home will crush the sector. Because of that, shares of the average office REIT have tumbled more than 30% this year. That has outpaced the roughly 12% decline of the average REIT.
As a result of this disconnect, contrarian investors can buy office REITs at much more compelling valuations these days. Two that stand out right now are Alexandria Real Estate Equities (NYSE: ARE) and Brookfield Property (NASDAQ: BPY)(NASDAQ: BPYU).
Holding its own amid the storm
While most office REITs have tumbled, Alexandria has bucked that trend as its shares were recently up 2% on the year. That's because its portfolio has held up very well as it collected more than 99% of the rent it billed in June and July. Its rental collection rate has been so strong this year that its tenant receivables balance stood at $7.2 million at the end of June, the lowest level since 2012. Thanks to that and the impact of recent acquisitions and development projects, its revenue surged nearly 17% on the year, and its FFO has risen almost 6%.
Usually, numbers like that would have boosted its share price by more than 2%. Instead, work-from-home fears have compressed office REIT valuations. However, that's much less of a concern for Alexandria because it focuses on owning and developing office campuses leased to collaborative life science, technology, and agtech companies where remote work isn't as feasible as in other industries.
For example, more than 80 of its life science tenants are currently working on solutions to combat COVID-19, which requires in-office work. Because of that, its core customers will continue to need office space, which suggests the REIT will be able to keep growing its FFO and dividend. Add that to its strong balance sheet, which is in the top 10% of all REITs, and it has the financial flexibility to keep growing. That combination of strength, stability, and upside makes this REIT look attractive, especially since its value has grown faster than its share price this year.
High-quality office properties on sale
Shares of Brookfield Properties have lost more than 20% of their value this year. While some of that sell-off is due to the company's retail portfolio, investors are also concerned about the future of its office properties.
However, Brookfield owns some of the highest-quality office buildings in the world, which will always be in high demand by tenants. What's worth noting is that while the company owns 134 premier office properties, most of the value is in its top 15 office complexes. The current market value for these locations is $21 billion, implying Brookfield has $10 billion of equity given the current debt level. Those properties make up the bulk of the $13.5 billion of equity in its office portfolio.
To put it into perspective, Brookfield estimates the current net asset value (NAV) of its office portfolio is about $13.40 per share. That's just a portion of its real estate holdings, which also include a core retail portfolio and investments in various real estate funds that hold assets across most property classes. Add it all up, and Brookfield pegs its current NAV at $27.01 per share, which is well below its current trading price of less than $14 a share. Because of this deep discount, investors can get a stake in the company's top-notch office portfolio at a dirt-cheap price these days.
High-quality office REITs at attractive values
This year's sell-off in the office REIT sector is providing investors with the opportunity to scoop up stakes in top-notch office properties at lower valuations. While many REITs look compelling right now, Alexandria and Brookfield stand out due to the overall quality of their portfolios. As market conditions normalize, their valuations will likely be among the first to recover.