SL Green Realty: a Little REIT and a Play on the Hot New York Office Market
The hottest real estate market in the U.S.: New York City.
Yeah, yeah, Boston, Seattle, San Francisco and Washington, D.C. have tall buildings that sell for insane prices, too. But New York is so much bigger than any of those. It’s a playground for billionaire real estate investors. Trump. Roth. Ross. Speyer. Zuckerman.
So is there a cheap way into this market? Not really but almost. There’s real estate investment trust called SL Green Realty (SLG).
SL Green doesn’t generally own the biggest, most glittery buildings that you ooh and ah over when you fly past Manhattan. A few, like 3 Columbus Circle and 100 Park Avenue are shiny. But honestly, most of its buildings are… workaday. Let’s just say that SL Green likes to boast about their “renovated elevator cabs” and “upgraded” lobbies and “nearby restaurants.”
Funny thing about New York real estate, though: When it heats up, even the second-rate stuff starts pouring off profits as though it’s trophy-quality. And Back in 2006, when the economy was going full bore and New York office space got scarce, SL Green’s rental revenue spiked. And that triggered a bubble in the company’s stock.
As you can see, the stock price collapsed pretty quickly in 2008 and 2009.
Yet SL Green’s revenues have remained pretty buoyant. Yes, there was a fear that SL Green would not be able to find new loans to replace its retiring mortgages, but the fears turned out to be unfounded. SL Green reduced its dividend and remained solidly cash-flow positive throughout the economic meltdown.
Now the economy is recovering and SL Green stock is still way below its 2006 peak. So is it a bargain?
No and yes.
SL Green’s shares are at about $78. That’s about 15 times what it will earn in “funds from operations”—earnings before depreciation and extraordinary gains or losses from property sales—next year, according to analysts. The other two REITs that own lots of New York office buildings, Boston Properties (BXP) and Vornado Realty Trust (VNO), are trading at 21 and 16 times 2013 FFO, respectively.
But SL Green’s buildings certainly aren’t as nice as theirs, and SL Green is smaller than either of them.
SL Green is also more heavily indebted than Boston Properties. SL Green’s liabilities are half of its enterprise value, versus less than 40% for Boston Properties.
The best argument for SL Green being a bargain is that its stock is trading at a pretty big discount to the underlying net value of its real estate—its net asset value.
NAV numbers aren’t easy to get. You need an analyst who knows property values in a REITs market. But Sandler O’Neill analyst Alexander Goldfarb knows New York well. And he estimates that the fair value of SL Green’s real estate equity—what’s left after you subtract the debt from the fair value of all its buildings, in other words—sorts out to more than $100.
So SL Green’s stock, priced at $78, is at a discount of nearly 25%. Goldfarb estimates that Boston Properties’ and Vornado’ shares are trading at much smaller discounts to their NAV. Like 5% discounts. So he’s bullish on SL Green.
It’s never cheap to buy into New York City office buildings. But SL Green may offer you a reasonable opportunity to do so now.