The Real Deal New York

A REIT rundown

While stocks are not up to pre-boom levels, analysts are more optimistic than they were a few months ago

February 01, 2013
By C.J. Hughes

From top: SL Green’s Marc Holliday, Vornado’s Mike Fascitelli and Boston Properties’ Mort Zuckerman.

After a frenzy of buying and selling in the face of declining stock prices, 2012 ended on an up-note for many of the real estate investment trusts with notable New York holdings. And while the companies’ stock prices have still not reached their pre-boom highs, many analysts are still bullish on the firms, arguing that most of them have deployed the billions they have raised in savvy, strategic ways.

In a sense, that rosy outlook marks a sharp reversal in a short span of time. Indeed, just a few months ago, some analysts were guessing that some of the most active New York REITs — including SL Green Realty, Vornado Realty Trust and Boston Properties — might buy up their own stocks in a bid to prop up the trading prices. But now, that added boost doesn’t seem necessary.

Indeed, sources say that as REITs signed more office leases in the fourth quarter and renovated existing space, investors flocked back to their stocks. In most cases, the influx rescued prices from recent lows.

“You had a pretty strong fourth quarter after the summer swoon,” said Robert Stevenson, an analyst with Macquarie Securities in Midtown. “If you buy smartly and create value, your stock price should move, which is what we saw.”

For example, SL Green, the city’s largest commercial landlord, saw its stock price jump from $71 a share at a recent low in November to $81 late last month. That may be below its recent 2007 peak of $146, but Stevenson said he believes it’s on target to hit $95 a share in the next 12 months.

If the still-soft Midtown leasing market improves (according to Cushman & Wakefield data, leasing volume declined in the area by 31 percent between 2011 and 2012), these REITs could see more upside going forward, other analysts noted.

“There is valuation upside here,” Stevenson said.

Among the most active New York REITs, SL Green appears to have been the most aggressive in 2012. That may have been part of a plan to counter its volatile stock price, which was up and down for much of the year, but took some sharp hits last spring and saw more gradual declines in the fourth quarter. The firm not only snapped up office buildings in 2012 — including 10 East 53rd Street for $257 million last February and 304 Park Avenue South for $135 million in June — it also shed assets.

Firm president Andrew Mathias said in a statement at the time of the 304 Park Avenue South deal: “It’s a classic SL Green investment — off-market, potential repositioning and creating value upon acquisition for both the company and the seller.”

In fact, the 53rd Street deal was ripe for repositioning even before the deal’s ink was dry: Late last month, publishing giant HarperCollins, a longtime tenant, announced that it was leaving the Midtown building for 195 Broadway in the Financial District.

In a conference call with investors in mid-2012, CEO Marc Holliday had this to say: Stock prices “are kind of steady or eroded, while the property markets have moved ahead.” An SL Green spokesman declined to comment further for this story.

 

Stabilizing the slide

What dragged on REIT values last year was news about investment banks’ laying off employees, creating the impression among investors that parts of the Manhattan office market remain weak, analysts say. Plus, a rise in the office availability rate — which measures space that is available now or will be in the next 12 months — in Midtown has made some analysts worry that the office market may be slightly overbuilt.

But the moves to stabilize declining share prices did not work as well for other firms as they did for SL Green.

Indeed, Vornado’s stock price remained fairly flat at about $85 late last month, largely unchanged since its fall low. (The company’s stock rocketed to almost $134 a share during the boom year of 2007, though it sunk to around $29 in March 2009.)

In response to questions about his company’s sluggish stock price, Mike Fascitelli, Vornado’s CEO, said in an August earnings call that, “we constantly look at the value of our shares. We’re not very happy with the value that is really below the net asset value.” (The company’s stock price on the day of the earnings call was $83.59.)

The company declined to comment for this article.

Nonetheless, Vornado was aggressive in 2012. In its heftiest deal of the year, it famously paid $708 million for one of the two retail condos at 666 Fifth Avenue; it also grabbed a majority share at Tribeca’s Independence Plaza, a rare residential play by the firm. (The sale price of the three-tower, 1,328-unit complex at 40 Harrison Street was $855 million. Stellar Management retained a minority stake.)

But Vornado shed some assets in 2012, too.

Most notable was the $751 million sale of Brooklyn’s Kings Plaza shopping center, in which Vornado had a stake. This came after having zero dispensations in 2011.

“They have been very opportunistic,” said John Stewart, a senior analyst with the research firm Green Street Advisors.

Much of that might be explained by Vornado’s stated goal of simplifying its business model and transforming from a largely retail landlord to more of a mixed-use one, said Brad Case, a senior vice president with the National Association of Real Estate Investment Trusts.

“They are now thinking about the portfolio they want to have going forward,” Case said.

However, Vornado is getting out-hustled by SL Green, said James Sullivan, an analyst at Cowen and Company, who has given a “neutral” rating to the firm’s stock. “They’re off their highs,” he noted.

 

Not just acquisitions

All told, publicly traded and privately held REITs shelled out more than $5 billion for acquisitions, which, though down from $12 billion in 2011, was higher than the $3.1 billion in 2010, according to research firm Real Capital Analytics.

Yet some companies sat on their hands.

Boston Properties — whose stock was at about $110 late last month, off its $116 high last fall, but higher than its recent $100 low in mid-November — didn’t buy or sell a single asset in 2012.

That was also true for normally active New York REITs like Brookfield Office Properties, General Growth Properties, iStar Financial, Apollo Commercial Real Estate Finance and Gramercy Capital, according to Real Capital.

But the inactivity was not necessarily a bad thing. In the case of Boston Properties, a firm which hit a stock peak of $126 a share in January 2007, some analysts say that company investors could be taking a positive view of the leasing activity at 250 West 55th Street. The new high-rise near Times Square has recently signed leases with two law firms (Kaye Scholer as well as Morrison and Foerster), according to news reports.

In general, Boston Properties’ buildings, which tend to be well-known structures in core areas, have impressive occupancy rates. Its 125 West 55th Street, for example, has a rate in the mid-90 percent range, analysts pointed out.

Others, though, say Boston Properties, which is headed by Mort Zuckerman, still has room to grow. “We have them as underperforming slightly, which was a surprise, since they are the blue chip of the office REIT sector,” said Stewart.

Sam Zell’s Equity Residential, meanwhile, seems to have suffered a bit despite buying, along with AvalonBay, a large portion of Archstone’s rental portfolio in a multibillion-dollar deal late last year (see related story, “IPOs on the horizon”).

Equity Residential’s stock price was around $58 late last month, basically unchanged from a year ago, and below its recent high of $63 in summer 2012.

 

Niche REITs

In many ways, the hotel industry has cottoned to the REIT structure more than any other type of property owner. An analysis by The Real Deal in the fall found that 7 of the 15 largest hotel owners south of 96th Street in Manhattan are REITs.

And while there were few major moves in terms of trading properties among the big hotel players last year, they did spend considerable capital repositioning.

For example, Host Hotels & Resorts — which, according to TRD’s recent analysis, is the biggest hotel owner south of 96th Street, with properties including Times Square’s hulking 1,967-room Marriott Marquis — spent 2012 rebranding the former Helmsley Hotel on East 42nd Street.

The image campaign may be helping. Late last month, the company’s stock price was around $17 — a steep spike from a recent low in fall 2011, when it was trading at about $10.

While the old guard generally locked in gains, to some extent, it was the nontraditional REITs whose bold moves were rewarded most.

Over the summer, the publicly traded REIT CubeSmart, a national storage company, completed its acquisition of 22 properties formerly owned by Storage Deluxe, most of them in New York City, for $560 million.

In breaking into the difficult New York market, CubeSmart has become a major force in that industry and is continuing to aggressively expand.

Still, overall, Sullivan said he thinks there will be “more of the same” on the REIT front going forward “until we have a clearer path forward [with] better conditions in financial services and government.”

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