Shares for office REIT, or real estate investment trust, SL Green Realty (NYSE: SLG) have lost about 30% of their value this year. While Manhattan's largest landlord has faced some headwinds from the COVID-19 outbreak's impact on that city, it's navigating the downturn reasonably well. It collected more than 90% of the rent it billed during the second and third quarters, sold several assets at excellent values, and made significant progress on securing new leases, as it's on track to achieve its target of 1.2 million square feet by year-end.
Given its success this year and what it sees ahead, the REIT believes the market has undervalued its stock. That's leading it to boost its share buyback program so it can gobble up even more of its beaten-down shares.
Building up a war chest to buy back shares
Earlier this year, SL Green launched the "$1 Billion Dollar Plan" to amass at least $1 billion in cash by the end of June. The company achieved that goal a month ahead of schedule, which enabled it to restart its stock buyback program. By the end of the third quarter, SL Green had repurchased $412.2 million of stock under its previously launched $3 billion program.
However, the company has continued to sell properties, including recently selling its stake in 410 Tenth Avenue for an eye-popping $952.5 million. That was the largest commercial property sale in the U.S. since March and enabled the company to "achieve extraordinary profits," allowing it to reduce debt and "generate additional liquidity for share repurchases."
It also allowed SL Green to increase its buyback program by another $500 million to a total of $3.5 billion.
Seeing the value that others are overlooking
In boosting its buyback authorization, SL Green's CEO Marc Holliday stated: "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 numbers back this view. For example, the company initially intended that its 410 Tenth Avenue redevelopment project would be a long-term investment. However, after receiving some interest in the property from prospective buyers, it decided to test the market. When the right deal came along, it jumped at the opportunity. It was an attractive value, considering the company bought the property in a $440 million deal 18 months ago and is still in the middle of a $650 million redevelopment project it won't complete until the third quarter of next year.
Not only will the transaction provide the company with cash to repay debt and buy back stock, but it also highlights the intrinsic value it's created thus far. Further, the deal suggests that buyers still highly value trophy properties in Manhattan despite concerns COVID-19 will have a long-term impact on occupancy and rental rates in the city.
On top of that, the company's stock trades cheaply on a cash flow basis. For example, SL Green currently estimates it will generate between $6.30 to $6.70 per share of funds from operations (FFO) in 2021. With the stock recently trading at around $63 per share, it sells for less than 10 times FFO at the midpoint of that guidance range. That's low, considering many REITs trade around a mid-teens multiple of their FFO.
Betting big on itself
SL Green believes the 30% selloff in its stock this year is an overreaction. While some of its tenants have struggled to pay their rent, the vast majority are paying on time. Further, it's securing new office leases and fetching strong valuations for properties it's selling. Because of those factors, the REIT believes its shares trade at a deeply discounted valuation, which is why it's planning to buy back even more stock. That undervalued price makes SL Green look like an attractive REIT for investors to buy these days, especially considering its monthly dividend yields an enticing 5.9%.