Why SL Green is on a selling tear right now

Why bother buying buildings when you can just buy your own shares? That, at least, appears to be SL Green Realty’s thinking.

The real estate investment trust expanded its share buyback program to $1.5 billion in December while shedding stakes in commercial properties, the Wall Street Journal reported. The rationale: SL Green’s shares trade for less than its buildings are supposedly worth, and buying more of them could be the easiest way to boost their value.

“We’re in a quirky period where REITs are trading at big discounts,” SL Green’s CEO Marc Holliday told the Journal. “Buying back your stock is the ultimate expression of your confidence in how cheap your stock is.”

The REIT is selling a 43 percent stake in office tower 1515 Broadway to Allianz Real Estate, valuing the property at $1.95 billion.

But other REITs are reluctant to follow SL Green’s strategy of selling buildings to buy shares. One reason: REITs are required to spend 90 percent of their income on dividends, meaning they are left with fewer funds to spend on renovations or building acquisitions. This can make managers reluctant to spend cash reserves on buybacks.

“When you have companies that are trading at 20% discounts to [net asset value], capital becomes even more precious,” Sandler O’Neill analyst Alexander Goldfarb told the Journal. “It’s the classic: When you want a company to do something, they’re hesitant to do it because they may need that money elsewhere.”

Boston Properties, for example, decided to invest in new development rather than stock repurchases, announcing $2.6 billion worth of projects over the past year.

“Although our stock is trading at a discount to consensus net asset value, we continue to see opportunities to invest our capital in the development of high yielding…projects that will grow our earnings in the future,” the firm’s CFO Mike LaBelle told the Journal. [WSJ] — Konrad Putzier