In the quarterly analytics we provided an elevator thesis on each REIT in the portfolio. Today I want to dig a bit deeper into SL Green.
SLG just reported 3Q earnings with fairly strong results driven by healthy rollups on expiring leases. More important, in my opinion, is the fact that SLG is sticking with its capital recycling strategy. It is selling a large asset for over $800mm in proceeds and a good chunk of these proceeds are going to share buybacks.
On the conference call there was an analyst attempting to dissuade SLG from continuing the buyback program. His reasoning was that the stock price remains discounted and consensus NAV had dropped, so therefore the buyback was not working.
I found Mark Holliday’s (CEO of SLG) response to this analyst to be perfect because it demonstrated his understanding of the true purpose of a buyback which is to accrete value on a per share basis.
“the gains on the program I think will be fully appreciated and realized when we stabilize the 8 development assets we now have in portfolio. There’s just an enormous pipeline of assets that we buy into every time we buy our stock at essentially below cost. And when we achieve stabilize value, and we impose that on an ever-decreasing shareholder base, I think the results will be very powerful. At that point, whether we get credit for it or not now in the public markets we can’t entirely control, but we certainly see the benefits on paper of an investment program that yields the highest returns.”
Consensus NAV is controlled by prevailing cap rates and market price is controlled by the whims of the market. Neither of these factors can be controlled by SLG. What they can control is fundamental value and they correctly recognize that buybacks are the more efficient way to increase fundamental value when the stock is trading at such a sizable discount.
We like investing with management teams that consistently prove to be good fiduciaries to their shareholders and SLG seems to be the best in the office space. The fact that SLG is growing both same store NOI and FFO/share during a very challenging environment for office is a clear bonus. SLG represents one of the best combinations of value and quality and we see it as a likely long term holding.