by Bryan Perry
August 4, 2020
Just when most of the investing world was ready to adopt the notion that the cutting-edge “work-from-home” model could be accomplished effectively by remote production, the ground shifted. Per a well-written Wall Street Journal article that drew much attention, it is becoming clear that workers in complex jobs in leading industries are indeed missing a lot in terms of execution, performance, and job satisfaction.
Initially, the pandemic sparked a massive readjustment of lifestyles for millions of employees that would embark daily to their lush corporate campuses loaded with collegial office atmosphere, on-site workout facilities, healthy gourmet dining, coffee bars, walking and bike paths, medical specialists, and pretty nice overnight digs to put in those extra-long hours to take projects to completion on time and under budget.
Now, they’re asked to work efficiently amidst all manner of noise from kids having to learn at home, dogs barking, landscape power tools, carpet cleaning, trucks, power washing trucks, and all other distractions of neighborhood life waging war on their work culture, which for many is overwhelming their initial “Gee, what a nice change,” attitude, replacing it with “Man, I sure miss my life at the modern tech campus.”
A basic human instinct reasserting itself is that “productive people need co-workers” to interact with, and not just on a screen. Personally, I much prefer person-to-person interaction. Others are thrilled to spend the day in their sweatpants and a button-down shirt for the Zoom call. Different strokes for different folks, but many others are missing a certain quality of life that the collective office experience presents.
What is quickly coming to the fore is that working remotely, for numerous job roles and business models, is becoming what my millennial sons would describe as “not awesome.” My older son works at pension manager TIAA-CREF in Denver, and the younger works at a sports and talent agency in Los Angeles. Both are working 100% remotely but would rather have the flexibility to work either at the office or at home.
Choice: This might be where the secular trend is leading us now, as the virus ends its deadliest phase.
The hiring process has become more complex. Productivity gains have slowed, and more employees are working out a new routine with their companies, according to a recent Wall Street Journal article (“Companies Start to Think Remote Work Isn’t So Great After All,” July 24, 2020).
Here are examples from three corporations cited in that article:
“You can tell people are getting fatigued,” said Peter P. Kowalczuk, president of Canon Solutions America, a division of copier and camera giant Canon Inc., which employs about 15,000 people across the country. Kowalczuk, who worked for months out of a bedroom in his home, went back to Canon’s U.S. headquarters in Melville, NY, in early July. Now, about half of Canon’s employees are coming to work at the 52-acre office campus, which features two ponds and a walking trail, and typically over 11,000 staffers in a single building. “We’re really a face-to-face business,” he said. “I don’t think offices are dead. The nature of what some companies do makes it tough, if not impossible, to function remotely.”
In San Francisco, startup Chef Robotics recently missed a key product deadline by a month, hampered by the challenges of integrating and testing software and hardware with its engineers scattered across the Bay Area. Pre-pandemic, they all collaborated in one space. Problems that took an hour to solve in the office stretched out for a day when workers were remote, said Chief Executive Rajat Bhageria. “That’s just a logistical nightmare. We tried it. It’s just not the same. You just cannot get the same quality of work.”
At Stifel Financial Corp., which employs more than 8,000 people, junior employees learn how to underwrite deals or develop pitch books by sitting beside more experienced colleagues and watching them work, said CEO Ronald J. Kruszewski. That’s hard to do remotely. “I am concerned that we somehow believe that we can basically take kids from college, put them in front of Zoom, and think that three years from now, they’ll be every bit as productive as they would have, had they had the personal interaction.”
Invest in Office REITs for the Coming “Return to the Office”
Under the guise of this new and profound trend that has evolved for the so-called greater good, shares of blue-chip office REITs have been crushed as investors took the position that former Class A-rated office buildings and office parks in strategically-located areas would become ghost towns. Not so fast. I’m beginning to believe that when this pandemic has been arrested, workers will return to their former patterns much faster than the market currently projects.
Hence, the dislocation of the deeply discounted prices of stocks within the office REIT space present an opportunity. One can find no less than 19 office REITs listed on the go-to www.reit.com website, where the world of all REIT categories and their individual companies and stocks are listed.
Here’s a case in point of just how dysfunctional the pricing in this sector is: Shares of Global Net Lease (GNL) pay a dividend yield of 9.96%, fully covered by current FFO, yet the company, which manages 288 triple net lease properties representing 34.2 million square feet from 126 tenants within 46 industries across nine countries has collected 99% of on-time rents for June, is trading at a 25% discount to where the analyst community believes it is fairly valued. That’s just one glaring example.
Navellier & Associates does not own Global Net Lease (GNL) in managed accounts. Bryan Perry does not own Global Net Lease (GNL) privately.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I won’t dispute that the work-from-home trend is ideal for many. Heck, I’ve been working as a financial editor out of my home office for 15 years, but I still frequent the publishing office for work-related projects on a regular basis. For people like me, the mix of home and corporate office works well, but I’ll be the first to admit, more gets done in a shorter time in the presence of other colleagues than at home.
When looking at the charts of the office REITs, they aren’t pretty – most are down hard and moving laterally to the right just off their March lows. We’re talking 20%-50% discounts to pre-pandemic levels. Picking the right ones involves some serious due diligence in terms of property location, quality of tenants, the industries represented by those tenants, how leases are structured, debt on the books, etc.
But it’s worth the effort, because the dividend yields are pretty fat (between 3% and 10%), and the upside price potential for the underlying stocks coming out of the virus looks promising. Unless one has a spacious, comfortable, well-laid out office at home, with modern office equipment, devoid of distractions, then working remotely for a big percentage of the work force isn’t all that it’s cracked up to be.
Is it time for income investors to consider select blue-chip office REITs? I think so.