The real-estate industry contributes 30% of global greenhouse gas emissions and consumes 40% of the world’s energy, yet the sector often doesn’t get attention from sustainability-minded investors.
Along with Barron’s fifth annual list of the 100 Most Sustainable Companies, we’ve also identified the 10 most sustainable real-estate investment trusts in the U.S., with the help of Calvert Research and Management, a unit of Eaton Vance owned by
Morgan Stanley. It’s the second year that Calvert produced a REIT ranking for Barron’s.
Kilroy Realty (ticker: KRC) and
Host Hotels & Resorts (HST) maintained their top two positions from last year, while
Boston Properties (BXP) jumped from eighth place to third, pushing
Alexandria Real Estate Equities (ARE) to fifth place.
Ventas (VTR), a healthcare facility owner, was newly added to the list and took fourth place, while data center operator
EQIX) fell from fourth place to ninth.
To produce the list, Calvert analyzed the 93 largest REITs by market value across five key areas of sustainability––shareholders, employees, customers, community, and planet. The planet category has the most influence when calculating the weighted average of scores since it’s considered the most financially material for the real-estate sector.
Many of the most sustainable REITs have a portfolio of properties with green building certifications such as LEED, EnergyStar, and Fitwel. To be certified, a building will be inspected for its energy efficiency, waste management, water conservation, air quality, access to amenities, and many other aspects.
Buildings with a green certification are often in higher demand and enjoy a rent premium, says Brendan McCarthy, ESG research analyst at Calvert. More tenants care about their businesses’ impact on the environment, employees, and community––not to mention the money saved on lower utility bills.
Host Hotels & Resorts, for example, invested $140 million in over 675 sustainability projects from 2016 to 2020. The expected annual utility savings from these investments is approximately $21 million, says Michael Lentz, the firm’s executive vice president of development, design, and construction. That means an average of 15% annual returns.
Greener buildings are also more likely to raise money with lower interest rates, since their credentials make them more attractive to lenders seeking sustainable projects to fund. Boston Properties, for example, has issued four green bonds since 2018, raising $3.55 billion, to fund its sustainable projects: “We do see a slight pricing advantage,” says Ben Myers, the firm’s vice president of sustainability, “There is a larger pool of investors attracted to green bonds.”
All this is good news for investors. Higher rent and lower cost of capital means more dividends returned to shareholders. Barron’s 10 most sustainable REITs have an average dividend yield of 2.6% as of the end of 2021, higher than the average 1.7% for all REITs in the
S&P 500 index.
|2022 Rank*||2021 Rank||Company||Ticker||REIT Industry||Weighted Score||2021 Return||Market Capitalization (bil)**||Dividend Yield**|
|2||2||Host Hotels & Resorts||HST||Hotel||73||18.9||11.8||0.0|
|5||3||Alexandria Real Estate Equities||ARE||Office||70||27.6||28.4||2.4|
*Rank based on non-rounded weighted average; **Market cap and dividend yield as of 12/31/2021; NR=not on the 2021 ranking; N/A= not available
Sources: Calvert Research & Management
The sustainable REITs returned an average of 36.7% in 2021, while the S&P 500 gained 28.8%.
Office REITs are some of the earliest adopters of green improvements, says McCarthy. Office landlords tend to have a long-term and more collaborative relationship with their tenants, who oftentimes have their own sustainability commitment and view the place they work as part of the overall plan, he says.
“Real estate has taken on an important role in helping our tenants meet their goals,” says Boston Properties’ Myers.
Three out of the five most sustainable REITs––Kilroy Realty, Boston Properties, and Alexandria Real Estate Equities––own office spaces across the nation. Kilroy is the first North American REIT to achieve carbon-neutral operations in 2020. Boston Properties aims to reach that goal by 2025.
Things might be more challenging for other groups. The lodging REITs, for example, often require 24/7 operations and, in some cases, luxurious amenities, which can be resource intensive, says Joanne Hamilton, Host Hotels’ executive vice president of human resources and corporate responsibility.
What’s more, the property owners are prohibited from operating and managing hotels, which can make it difficult for them to influence certain sustainable investments and property-level practices.
Still, there are ESG leaders in each real-estate category: Host Hotels & Resorts in lodging, Ventas in healthcare,
Kimco Realty (KIM), and
Brixmor Property (BRX) in retail, and Equinix in data center. While there were no apartment REITs on the list last year,
AvalonBay Communities (AVB) and
Equity Residential (EQR) joined the top 10 this year, signaling that other corners of the real estate market are catching up in their ESG effort as well.
Write to Evie Liu at [email protected]