SL Green trounces NYC-focused REITs in Q2

New York /
Jul.July 03, 2013 06:00 PM

Another quarter, another stock market coup for SL Green Realty. Though most New York-focused real estate investment trusts failed to match up to their national counterparts, SL Green outperformed both the MSCI US REIT Index and the Standard & Poor 500 Stock Index.

Boston Properties, AvalonBay Communities, Sam Zell’s Equity Residential and Vornado Realty Trust all posted positive returns, but underperformed in comparison to the 7.71 percent total return of the MSCI, which tracks most of the country’s major REITs, and the S&P 500’s 14.42 percent total return, according to data provided to The Real Deal by Sandler O’Neill + Partners. (Sandler O’Neill, a Midtown-based investment banking firm, does not track Brookfield Office Properties.)

But SL Green, the city’s largest office landlord, posted a robust 17.66 total return. The above-average result is likely due to the company’s presence in the booming Midtown South market, its attractive mid-range office rents, and its ability to pounce on lucrative mezzanine financing deals, according to Sandler O’Neill analyst Alexander Goldfarb.

“Midtown South is the hottest submarket in the country,” Goldfarb said. “SL Green’s average price point – in the $60s range – is the sweet spot for the market.”

SL Green benefited from “improving sentiment about Manhattan office, especially the value-oriented price point,” said Michael Knott, an analyst with Green Street Advisors. “Shares of SL Green still have room to run versus the peer group.”

An SL Green spokesperson did not immediately respond to requests for comment.

In contrast, Boston Properties – whose 1.54 percent total return was the lowest among the New York players — tends to focus on the upscale market, a strategy that “hasn’t played out well,” Goldfarb said.

Boston Properties’ returns were hurt by “perceived challenges with a CEO transition and capital allocation question marks,” Knott said.

“These fears are overdone,” he added. “The company is in great shape, and still has the best management among office REITs.”

A marquee deal such as the $1.4 billion sale of a 40 percent stake in the GM Building — in which Boston Properties owns a majority stake — would boost the asset’s value, Goldfarb said, but wouldn’t immediately drive earnings.

“The big juice is at the tail end of this decade,” he added, when leases for below-market tenants such as Estée Lauder will expire.

Vornado also enjoyed an improved total return of 7.34 percent this quarter, which demonstrated investors’ renewed confidence in the one-time Goliath, which has struggled in recent years.

In April, Vornado Chairman Steven Roth took back the reins of the company from ex-CEO Michael Fascitelli, in a move that surprised many in the market, as The Real Deal reported.

“People are increasingly realizing that Roth wants to make good on unlocking the value that’s within the company,” Goldfarb said. “He wants to put the lackluster track record of the past 10 years into history.”

Indeed, Vornado’s shareholders received a shot in the arm earlier this month from news that Facebook signed a 10-year lease at 770 Broadway for 100,000 square feet.

A spokesperson for Vornado declined to comment.

Equity Residential and AvalonBay still lagged behind the market, though they both showed improvement from last quarter’s negative returns. Their joint $6.5 billion purchase of Archstone’s apartment building portfolio from Lehman Brothers Holdings, which closed in March, continued to hurt their returns, Knott said, but “but apartments are attractive, especially AVB and EQR.”

Though Federal Reserve Chairman Ben Bernanke’s recent remarks about scaling back the stimulus package had an immediate negative effect on REIT stock prices, Goldfarb said the market had since rebounded after the “overreaction,” and that investors continue to think of REITs as attractive assets.


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