Four years after the pandemic changed where people work, real estate as a whole is still seen as a loser by the Wall Street crowd. RMX, an index of publicly traded landlords, closed down 0.3% in the first quarter versus a 10.6% gain for the S&P 500. For those keeping score at home, it was the real estate group’s fifth-worst performance over the last 19 years compared to the rest of the market, Evercore ISI said Monday.
But one name has bounced back stronger than all the others and, strangely, it’s a landlord in the market’s least-favorite kind of real estate: office buildings. SL Green Realty, the city’s largest office owner, saw its stock rise by 24% last quarter. Coming in a distant second, up 16%, was Virginia-based Park Hotels & Resorts, owner of the 1,878-key New York Hilton Midtown. No. 3, up 13%, was California-based Macerich Co., owner of the Kings Plaza Shopping Center in Brooklyn.
In a market that remains bearish on office real estate, it’s remarkable for the best-performing stock to also be the most pure-play bet. SL Green owns 30 million square feet of Manhattan commercial space and nothing else. It sounds like the wrong thing to have when more room than ever is available for rent.
Bulls are betting Midtown-based SL Green will succeed in selling buildings high and buying them low. It’s how short-sellers make money and a tricky game requiring exquisite timing. But bear markets are when smart investors separate from the herd, and SL Green has a record of success.
The firm sold 625 Madison Ave. to Related Cos. in December for $633 million and its 50% stake in 245 Park Ave. to a Japanese investor last June for $1 billion, higher than the market expected. Now SL Green is auctioning off a piece of the supertall tower it developed at 1 Vanderbilt Ave., next to Grand Central Terminal. The building is 99.4% leased and Evercore thinks it’s worth $4.5 billion.
On the buying front, SL Green is also trying to raise a $1 billion fund to invest in distressed office mortgages. Opportunities abound, as the landlord demonstrated when buying out a partner in a 65%-vacant Herald Square commercial building for no money. It then extinguished the $182.5 million mortgage by paying the lender only $7 million.
“Playing debt-forgiveness chicken only works if you want the building,” Piper Sandler analyst Alexander Goldfarb wrote in a January report. “SLG’s strategy works because they understand the upside opportunity of the asset.”
SL Green is also looking to convert into apartments a mostly abandoned office building at 750 Third Ave. Of the 543 units, 20% would be affordable and in return the firm wants a waiver on the building’s $10 million annual property tax bill. Approval from Albany is needed to proceed but the Adams administration wants to be helpful.
In addition, the firm leased 550,000 square feet of office space in the first quarter, according to a person familiar with the matter, 10% more than a year earlier. SL Green has also maintained its dividend when Vornado, New York’s second-biggest commercial landlord, didn’t.
The stock’s 24% jump last quarter brought SL Green’s price up to $55 a share, still well below its early-2020 high of $100 a share. Higher interest rates are weighing on all office landlords and even if SL Green hits its 2024 target of leasing 2 million square feet it would still lease 20% less space than in 2019. It can’t be overlooked that the Canada Pension Plan, with more than $400 billion in client assets, sold its 29% stake in a Park Avenue South office building for $1.
No doubt many more players will bail on properties. Some might even go bust. But SL Green and its shareholders are betting they’ll win this real-time game of Monopoly.
“Borrowers and lenders are adults,” Goldfarb wrote, “everyone knows the rules.”
Aaron Elstein , 2024-04-01 20:01:32
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