Earnings metrics for more than half of US office real estate investment trusts dipped as occupancy rates declined and property dispositions picked up during the 2023 fourth quarter.

Funds from operations, EBITDA down for over 50% of office REITs

Twelve office REITs ended the year with a quarter-over-quarter drop in operating funds from operations (FFO) per share. Operating FFO per share improved sequentially for four REITs while remaining flat for three REITs during the fourth quarter, according to an S&P Global Market Intelligence analysis.

Market Intelligence defines operating FFO as FFO adjusted for extraordinary items or other nonrecurring items at the discretion of the company. Office REITs sometimes refer to this as normalized FFO or core FFO.

SL Green Realty Corp. posted the biggest drop in operating FFO, declining 43.3% quarter over quarter to 72 cents per share during the fourth quarter. In a Jan. 24 earnings release, it was explained that SL Green's most recent operating FFO was $1.14 per share before giving effect to 15 cents per share of noncash fair value adjustments on mark-to-market derivatives, as well as to 27 cents per share of nonrecurring general and administrative charges related to the nonrenewal of the REIT's former president. After taking into account these two line items, SL Green's operating FFO per share would have been down 10.2% from the previous quarter and down 21.9% year over year.

The REIT raised its FFO-per-share guidance for full year 2024 to a range of $5.90 to $6.20 from a previous range of $4.90 to $5.20. On a Jan. 25 earnings call, SL Green CFO Matthew DiLiberto said the adjustment was related to the gain on debt extinguishment.

"The guidance adjustment for FFO is purely the gain of the 2 Herald discounted debt extinguishment as offset by taking out the generic $20 million gain we had in there. So that math works out to exactly $1," DiLiberto said.

Three other office REITs — Orion Office REIT Inc., Hudson Pacific Properties Inc. and Creative Media & Community Trust Corp. — posted double-digit declines in operating FFO during the fourth quarter.

Office Properties Income Trust reported fourth-quarter FFO of 95 cents per share, down from $1.02 per share in the third quarter. Office Properties CFO Brian Donley attributed the decline, which was 1 cent below the REIT's guidance range, partly to higher operating expenses.

"The decrease on a sequential-quarter basis was driven by higher interest expense and lower [net operating income] as a result of Q4 tenant vacates and operating cost increases," Donley said on an earnings call. The REIT expects a weaker normalized FFO for the first quarter, at a range of 79 cents to 81 cents per share. "The decrease sequentially from Q4 is made up of several items, most notably increased interest expense related to our financing activity and lower rental income," Donley added.

Concerning recurring EBITDA, 14 office REITs posted sequential declines during the fourth quarter, while seven reported quarterly improvements. Additionally, Market Intelligence calculated recurring EBITDA in the negative for two REITs in the fourth quarter: Paramount Group Inc. at negative $101.9 million and SL Green at negative $48.6 million.

Office Properties booked the biggest quarterly drop in recurring EBITDA, falling 28.4% to $54.3 million. Orion Office and Hudson Pacific also posted double-digit quarterly declines, at 16.8% and 13.6%, respectively.

The majority of office REITs posted lower operating FFO per share compared to their year-ago and pre-pandemic levels.

More than half of the office REITs logged higher recurring EBITDA than their pre-pandemic levels.

Median rent ticks up; occupancy rate down

The office sector's median rent grew slightly during the fourth quarter.

Median rent was at $51.48 per square foot per year for the last three months of 2023, compared to $51.41 in the preceding quarter and $50.92 in the fourth quarter of 2022. Rents are also comparably higher than their pre-pandemic levels, with median rent increasing 14.9% during the fourth quarter of 2019.

Paramount Group had the highest average office rent, at $90.93 per square foot per year. It was followed by Vornado Realty Trust and Boston Properties Inc., with average office rents per square foot per year of $86.30 and $78.81, respectively.

City Office REIT Inc. and Highwoods Properties Inc. reported the largest quarterly increases in office rent, both up 0.9% from the quarter prior. City Office's rent rose to $33.01 per square foot per year, while Highwoods was up to $32.18 per square foot per year.

By contrast, Kilroy Realty Corp. registered the biggest drop in average office rents, declining 11.1% from the previous quarter to $56.31 per square foot per year. It was followed by Franklin Street Properties Corp., with a 2.4% quarterly decline to $30.72 per square foot per year.

Cousins Properties Inc.'s average office rent fell 1.2% to $33.53 per square foot per year.

Cousins Properties Executive Vice President of Operations Richard Hickson attributed the company's softer lease metrics in the fourth quarter to the geographic mix of completed leasing activity. "In short, our leasing this quarter was in buildings where net rents are generally lower than our average," Hickson said on an earnings call Feb. 8.

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The office REIT median occupancy rate dipped in the fourth quarter to 86.3%, down 1.6 percentage points on an annual basis. The occupancy rate reflects a fall of 6.7 percentage points compared to the fourth quarter of 2019, just before the COVID-19 pandemic.

During the fourth quarter, Franklin Street had the lowest office occupancy rate, at 71.5%, followed by Equity Commonwealth, at 81.2%.

Net Lease Office Properties had the highest occupancy rate, at 97%. COPT Defense Properties and Vornado followed, with occupancy rates of 95.3% and 90.7%, respectively.

More dispositions in Q4 2023

More transaction activity was seen in the office REIT space during the fourth quarter, following a slowdown in the prior quarter. The uptick was mostly buoyed by an increase in asset dispositions.

Office property dispositions during the fourth quarter totaled $1.45 billion, a huge hike from $283.9 million in the third quarter.

Hudson Pacific had the highest value of dispositions during the fourth quarter, after selling two properties in Los Angeles — One Westside and Westside Two — for a combined amount of $700 million near the end of December. The two properties were owned by a joint venture between Hudson Pacific and Macerich Co., with the former holding 75% interest and the latter owning 25%.

Other office REITs with massive dispositions during the fourth quarter include Alexandria Real Estate Equities Inc., at $439 million, and Franklin Street, at $116 million.

Property acquisitions remained relatively low during the quarter, at $154.5 million, up from $85.9 million in the third quarter of 2023.

REIT stocks fare well below pre-pandemic levels

US equity REIT stocks outperformed the S&P 500 during the fourth quarter. Among the REIT sector indexes, office stocks had the third-highest total return, just below regional malls and self-storage. The Dow Jones US Real Estate Office Index gained 22.4%.

As of April 4, the Dow Jones US Real Estate Office Index was still down 48.9%, compared to the end of 2019. It underperformed the broader Dow Jones Equity All REIT index, which declined 8.2% during the same period.