But the dividends are so sweet – until they get cut or “suspended.”
By Wolf Richter for WOLF STREET.
We’ve talked a lot about the debt of commercial real estate’s office sector defaulting and hitting lenders, mostly holders of commercial mortgage-backed securities (CMBS), namely bond mutual funds, pension funds, etc. So far, banks have been spared the big hits. We’ve talked about the first sales of office towers finally happening in the new era of working-from-home and office-footprint-reduction, at huge discounts, some of them in foreclosure sales at brutal prices. You can see all this stuff here.
Today we take a look at office Real Estate Investment Trusts (REITs) that own some of these towers, and whose shares have gotten crushed.
Hudson Pacific Properties cut its dividend in half today, to 12.5 cents a share to preserve about $18 million in cash this quarter.
“We’re a visionary real estate company focused on epicenters of innovations for media and tech,” it describes itself ominously on its website. It specializes in office and studio properties in some of the hardest-hit office markets in the US: Los Angeles, San Francisco, Silicon Valley, and Seattle, with office market vacancy rates, per Savills, between 23% and 33%.
It had preannounced a cut of this magnitude in its earnings report on May 8, when it disclosed a drop in revenues and another net loss, in a series of quarterly net losses that started in 2020. Just four days ago, it promoted an investor presentation in which it explained how, despite all the issues out there, just about everything was either hunky-dory in its corner of commercial real estate, or would soon become hunky-dory again.
The shares have collapsed by 86% since the peak in February 2020, and are comfortably ensconced in my pantheon of Imploded Stocks. Shareholders of record on June 20 will be paid the new dividend. At the current share price of $5.20, that pencils out to be a dividend yield of just under 10%.
Investors who’ve bought the shares over the years to get the fat dividends have gotten crushed by the plunging share price. At $5.20 today, shares are less than one-third of the IPO price of $17 in 2010 (data via YCharts):
It’s in good company.
Shares of Boston Properties [BXP], the largest office REIT by market cap, have plunged by 63% from the peak in February 2020, to $54.11. It owns the Salesforce Tower in San Francisco, where two older office towers just sold for 70% off the original listing price, the first two sales in the new era of working from home:
Shares of Kilroy Realty Corp [KRC], the second largest office REIT by market cap, have plunged 66% from their high in February 2020, to $29.94 currently:
Shares of Cousins Properties [CUZ], the third largest office REIT by market cap, have plunged by 50% from their recent high in February 2020 and by 82% from their all-time high in August 2000 while the Dotcom Bust was going through a sucker rally, to $21.50.
Share of Vornado Realty Trust [VNO], the fourth largest office REIT by market cap, have plunged by 77% from their January 2020 high, by 83% from their January 2015 high, and by 85% from their January 2007 high, to $15.43. Also a member of my pantheon of Imploded Stocks.
Vornado suspended its dividend altogether for 2023. It said it plans to re-start paying dividends next year, but maybe in stock or cash or a combination of both, it said.
It wants to raise cash by selling some of its office properties. So it’s the second largest office landlord in New York City. In Manhattan, there have been three sales of office towers recently that serve as benchmarks for the new era: respectively at 50% off the 2016 valuation; at 38% off the 2020 refinance valuation but not including renovation costs since then; and at 41% off the 2020 asking price. PE firm Blackstone, rather than trying to sell its 26-story 1950s tower in Manhattan, walked away from it and the $308-million loan to let CMBS holders worry about selling it. So raising cash by selling office towers in this environment is not going to be fun.
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