New York-focused REITs, with the exception of SL Green, struggle in Q1

The large New York-focused real estate investment trusts struggled in the first quarter of 2013, unlike their national counterparts, with only SL Green Realty outperforming both the MSCI US REIT Index and the Standard & Poor 500 Stock Index. 

Boston Properties, AvalonBay Communities, Equity Residential and Brookfield Office Properties all reported negative returns, which analysts blamed on leadership shifts, an aversion to risk and the lackluster office market. Vornado Realty Trust had a positive return, but still performed well below the market.

On the plus side, though, SL Green stood tall. SL Green shareholders received a 12.77 percent return, considerably above both the MSCI US REIT Index’s (which tracks most of the country’s major REITs) 8.07 percent return and the S & P 500 Index’s 10.61 percent return, according to data provided to The Real Deal by Midtown-based investment banking firm Sandler O’Neill + Partners.

Sandler O’Neill analyst Alexander Goldfarb attributed SL Green’s success to the company’s relatively leveraged structure, stable management team, and ability to execute on big-ticket financial transactions, such as the $925 million financing deal the REIT arranged in March for Joseph Chetrit’s $1.1 billion purchase of the Sony tower at 550 Madison Avenue.

All the major New York REITs took a hit because of investor skepticism about the Manhattan office market, but SL Green withstood the turmoil better because its “portfolio is oriented toward the mid-range price point, where demand is stronger,” said Michael Knott, an analyst with Green Street Advisors.

REITs such as SL Green that were willing to take a risk with their holdings are faring the best so far this year, Knott said: “REIT investors appear to be even more risk-seeking than bond participants.”

Total Q1 stock returns for major (BPO excluded) New York REITs . (c/o of Sandler O’Neill + Partners- click to enlarge)

In January and February alone, SL Green closed on 35 Manhattan office leases covering 457, 677 square feet, the company announced last month. Also, the company is looking to sell the land underneath the 650,000-square-foot Lipstick Building for north of $500 million.

Running a distant second to SL Green was Vornado Realty Trust, with a 5.34 percent return. The unexpected and abrupt departure of Michael Fascitelli brought down the REIT’s shares, Knott said, as did the $224.9 million loss on the company’s JCPenney investment, as The Real Deal has reported.

“VNO’s JCP investment is a relatively small part of the company,” Knott said, “but it continues to have ‘franchise value’ ramifications” as investors question the wisdom of the decision.

Boston Properties reported a dismal negative 3.87 percent return, possibly the fallout of a shakeup in its executive suite this quarter as well, Knott said. Last month, CEO Mortimer Zuckerman announced his resignation and the board chose former Lehman Brothers Holdings Chairman Owen Thomas as the REIT’s new head, as TRD reported.

AvalonBay Communities showed a negative 5.79 percent return and Samuel Zell’s Equity Residential had a negative 2.13 percent return. Their joint $6.5 billion purchase of Archstone’s apartment building portfolio from Lehman Brothers, which closed in March, likely had an adverse effect on their performance, Goldfarb said.

“Lehman owns a stake in both companies, which is an overhang (a deterrent to investors buying stock until a large shareholder sells), which means they will probably exit,” he said.

Brookfield Office Properties had a return of negative 0.47 percent, according to Yahoo Finance. Knott attributed its lackluster performance to an overhang “related to its large pending vacancy Downtown.”