New York City was one of the hardest hit by the pandemic, as it was an early epicenter of the virus. That led state and local governments to impose restrictions to slow the spread. Restaurants and entertainment venues closed their doors, and companies vacated their office buildings. While that first surge has since faded, the city has yet to reopen fully. These restrictions have had a noticeable impact on the city's leading office landlord, SL Green Realty (NYSE: SLG), as many of its buildings currently have very few occupants.
However, the office real estate investment trust (REIT) believes the New York City market will rise once again. That's leading it to make a big bet that its stock price -- which tumbled almost 25% since the beginning of last year -- will rebound as well.
Cashing in on high-quality office buildings
While SL Green's share price has slumped, the value of high-quality office buildings has held up reasonably well despite the pandemic. That's mainly due to strong interest from institutional investors flush with cash and able to borrow money at low interest rates. SL Green has been taking advantage of the higher private market values for commercial real estate by cashing in on select properties.
For example, last month, the company sold its 25% interest in some commercial condominium units at 55 West 46th Street (Tower 46) to one of Brookfield Asset Management's (NYSE: BAM) real estate funds. The deal values the units at $275 million, with SL Green expecting to receive about $20 million in net cash proceeds.
The REIT's chief investment officer, David Schonbraun, said in a press release, "The transaction also serves to further demonstrate the resiliency of the Manhattan office market and the continued demand by institutional investors for well-located, Class A real estate assets in Midtown."
This sale followed an even bigger one toward the end of last year. In November, the REIT and its partners sold 95% of their interest in 410 Tenth Avenue, valuing the property at $952.5 million. SL Green initially planned to hold that property, which it's in the process of redeveloping. However, the company took advantage of the demand for high-quality trophy assets and sold the building to lock in what it calls "extraordinary profits."
The company completed several other property sales over the past year, generating additional cash. That gave it a tremendous amount of financial flexibility.
While SL Green used the cash generated from asset sales to do several things, including repay debt, make a few small acquisitions, and pay a special dividend, the primary purpose was to fund share buybacks. The company boosted that program by $500 million in December, pushing the total authorization to $3.5 billion. It's putting a priority on the repurchase program because, according to CEO Marc Holliday in a press release: "We believe the stock price continues to significantly lag behind the real financial value of the platform. So we intend to continue to invest in a strategic share repurchase program with the proceeds from asset sales, as we believe strongly that using incremental capital to buy our stock provides our shareholders the highest return on investment."
The company has acted on the belief that its current stock price doesn't reflect its assets' real value by selling additional properties to buy back more stock. In commenting on the 410 Tenth Avenue sale, the company noted that one of the reasons it chose to cash in rather than hold that asset for the long term was to "generate additional liquidity for share repurchases." It made a similar comment on the sale of Tower 46, noting the deal would allow it to "accretively reinvest the capital into our share repurchase program."
The REIT has now repurchased 32.4 million shares of common stock and 1.1 million common units of its operating partnership. As a result, its total outstanding shares have fallen by nearly 30% over the past couple of years.
That repurchase program paid big dividends last year, as SL Green's FFO per share rose from $7.00 in 2019 to $7.11 in 2020, even though total FFO fell from $605.7 million to $562.7 million due to asset sales and the impact of the COVID-19 outbreak.
The company's share count will continue falling as it buys back additional shares over the coming year, especially given the price decline in the past year. That's why the REIT expects FFO to hold up reasonably well in 2021 despite some continued headwinds from the pandemic and asset sales. That sets it up for future earnings growth as the Manhattan office market recovers, and it completes its current slate of development projects.
Buying back its stock as fast as it can
SL Green Realty believes there's a big disconnect between its stock price and its vast Manhattan office portfolio's underlying value. That's leading the REIT to sell select properties to highlight their value and repurchase more of its discounted stock. Its recent moves to boost its buyback authorization and sell another stake in an office asset further demonstrate its belief that one of the best investments it can make is buying back its stock. That suggests shares of this office REIT could have more upside ahead as it continues betting big on an eventual recovery in its operations.