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With $1B+ War Chests, These Office REITs Could Go on Acquisition Sprees


Sep 19, 2020 by Matthew DiLallo

Office REITs (real estate investment trusts) are getting hammered this year. On average, they're down about 25%, according to Nareit, which has underperformed the REIT sector's decline. The primary issue weighing on office valuations is the fear that work-from-home trends will crush occupancy levels and rental rates.

However, the steep drop in market values might benefit some office REITs because they entered this industry downturn with cash-rich balance sheets. Several are sitting on more than $1 billion in cash. That gives them the financial flexibility to navigate through these challenging times and potentially take advantage of acquisition opportunities that might arise should their financially weaker peers need to sell assets to bolster their balance sheets.

Its patience could finally pay dividends

Equity Commonwealth (NYSE: EQR) has been steadily selling properties over the past few years to take advantage of a seller's market for office buildings. That string of sales enabled the company to build up a massive cash war chest that stood at $3.4 billion at the end of the second quarter. The company has been waiting to put that cash to work once the right opportunity came along.

The company's patience might finally pay off. That's because the economic downturn resulting from the COVID-19 outbreak will likely have a profound effect on the office real estate market even if it doesn't cause a permanent shift in working from home. This impact could open the door to many different types of investment opportunities, including asset purchases, corporate M&A (mergers and acquisitions), or development projects. With such a massive cash position, it could make a needle-moving deal that has the potential of creating lots of value for its investors.

A fortress-like balance sheet gives it the flexibility to shop

Leading office REIT Boston Properties (NYSE: BXP) had also sold several properties in recent years to bolster its financial position. As a result, the company ended the second quarter with $1.9 billion of cash to go with $1.5 billion available on its credit facility. To put that into perspective, it's enough liquidity "to redeem our consolidated debt maturities through early 2022 and fund our entire $1.1 billion of remaining development costs in our pipeline," according to comments by CFO Mike LaBelle on the second-quarter conference call. However, given that Boston Properties has one of the highest credit ratings in the office sector, it can easily refinance that debt and fund a portion of its development spending with new borrowings.

Because of that, it has a nice cash war chest to go shopping if the right acquisition opportunity emerges. CEO Owen Thomas noted on the second-quarter call that the company is already looking for: "value-added investment opportunities where we can utilize our real estate operating platform to create value. These investments are primarily being pursued with private equity partners." By working with partners, the company can leverage its capital to capture more opportunities without stretching its balance sheet or selling more stock when the value is low, given that its shares sold off by about 40% on the year on work-from-home fears.

Finishing the $1 billion plan ahead of schedule

Leading Manhattan-focused office REIT SL Green Realty (NYSE: SLG) spent the early part of this year's downturn shoring up its balance sheet. The company set a goal to boost its cash position to $1 billion, which it achieved ahead of schedule and exceeded the target by $200 million. That allowed it to start buying some deeply discounted Manhattan real estate by repurchasing some of its shares after they fell about 50% this year.

Despite buying back some stock, SL Green still had more than $1 billion of cash on its balance sheet near the end of July. That fortified balance sheet will enable it to withstand the currently challenging market conditions. Then, once some of the uncertainty fades, the company will have the flexibility to put more of its liquidity to work. It could do that by making acquisitions if some prime Manhattan office real estate came along at a great price.

Lots of cash to go shopping

Several office REITs have built up big cash war chests. That gives them lots of cushion and flexibility to weather the sector's current challenges and go on the offensive as enticing opportunities emerge because of the downturn. This combination of safety and upside makes them interesting REITs to watch because they have the potential to make needle-moving deals that could enrich their investors in the coming years.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.