Last year was brutal for real estate investment trusts (REITs). The sector delivered a total return approaching negative 25%. The industry faced several headwinds, including a significant surge in interest rates and waning demand for rental space across several property classes.
Many REITs believe the steep sell-off in their shares last year was too much. That led the sector to repurchase $4.76 billion of shares in 2022, according to S&P Global Market Intelligence. That was the industry's highest rate since 2018.
Here's a look at the property sectors and REITs that drove last year's buyback binge.
Skyscraping buybacks
Office REITs led the way in buying back their shares last year at $845.5 million in repurchases. Driving this was the sector's slumping share prices due to waning office demand and higher interest rates. Office REITs delivered the worst performance in the industry last year, producing a negative total return of 37.6%.
Hudson Pacific Properties(NYSE: HPP) led office REITs in buying back stock. The West Coast-focused office REIT spent $255.3 million (fifth highest among REITs) to repurchase 10.3 million shares. That was 6.8% of its outstanding shares. Hudson Pacific bought back shares at a whopping 55% discount to the estimated net asset value (NAV) of its office and studio properties.
Other notable office REIT repurchasers were City Office REIT(NYSE: CIO), which spent $50 million to retire 9.2% of its outstanding shares (at a 38% discount to its NAV), and Equity Commonwealth(NYSE: EQC), which spent $154 million to buy back 5.4% of its stock. Equity Commonwealth has sold off almost all its office properties and is returning cash to shareholders while it searches for new investment opportunities.
Apartment sale
Multifamily REITs were the next biggest share repurchasers in 2022, spending $655.3 million in aggregate. The sector was also under a lot of pressure in 2022 from higher interest rates and slowing rent growth. That drove apartment REITs to produce a negative total return of over 31%.
Apartment Income REIT(NYSE: AIRC) was the leading repurchaser among apartment landlords. The company spent $316.7 million (fourth highest among REITs) to buy back 8 million shares, reducing its outstanding shares by 5.1%. It repurchased shares at an estimated 15.6% discount to the NAV of its apartment portfolio.
Essex Property Trust(NYSE: ESS) was another notable multifamily repurchaser. It spent $189.7 million to retire 1.1% of its outstanding shares, taking advantage of a 12.2% discount between the share price and its NAV.
Big-time buybacks
Several other REIT subgroups had notable repurchasers. Timberland REITWeyerhaeuser(NYSE: WY) bought back the most stock in the REIT sector last year at $555 million. That was more than 90% of the repurchases by timberland REITs. It retired 2.1% of its outstanding shares and bought them back at an estimated 19.3% discount to the NAV of its leading timberlands portfolio.
The timberland REIT's policy is to return 75% to 80% of its funds available for distribution to shareholders via a base dividend, an annual supplemental dividend, and opportunistic share repurchases.
SBA Communications(NASDAQ: SBAC) had the second-biggest buyback in the REIT sector at $431.7 million. That led communications infrastructure REITs at over 80% of the subgroup total. SBA retired 1.2% of its outstanding shares. Unlike most other REIT buybacks, it repurchased shares at a premium to its NAV (6.9%). Instead of making opportunistic repurchases, it steadily buys back shares each year.
JBG Smith Properties(NYSE: JBGS) had the third-highest buyback at $360.7 million of repurchases last year. That led diversified REITs at 95% of that sub-sector total. The Washington, D.C., focused REIT owns office, multifamily, and retail properties. It's the exclusive developer of Amazon's new headquarters in National Landing.
JBG Smith retired a whopping 11% of its outstanding shares last year, repurchasing them at an estimated 39.7% discount to the NAV of its diversified portfolio. The REIT funded its repurchases through its capital recycling strategy. It's selling noncore assets to pivot its portfolio to 50% multifamily and 50% commercial space in National Landing.
Real estate bargains
REITs are better known for paying dividends than for repurchasing shares. However, given the pressure the sector faced last year, many took advantage of their falling share prices to buy back stock at a big discount to their NAV in most cases.
Many REITs believe that buying back their stock is a more attractive investment right now than making acquisitions or starting new development projects. Because of that, these buybacks could pay big dividends for investors in the coming years by enabling the REITs to grow their NAV per share faster.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew DiLallo has positions in Amazon.com, Equity Commonwealth, and Weyerhaeuser and has the following options: short July 2023 $35 calls on Weyerhaeuser. The Motley Fool has positions in and recommends Amazon.com and S&P Global. The Motley Fool recommends City Office REIT. The Motley Fool has a disclosure policy.
