Manhattan's largest office landlord, SL Green Realty (SLG 0.27%), has faced its share of headwinds due to the pandemic's impact on the city's office market. However, that hasn't stopped the company from finding ways to grow shareholder value. It's continued to lease space in its properties, execute its development projects, and enhance its portfolio.
These moves are paying dividends, quite literally, for shareholders. The office-focused real estate investment trust (REIT) recently increased its regular dividend and declared a special dividend. Here's a closer look at what's driving these moves.
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Another year, another dividend increase
SL Green is increasing its annual dividend by 2.5% to $3.73 per share. The office REIT pays a monthly dividend, amounting to $0.3108 per share at the new rate and yielding 4.8%. The company has now given its investors a raise for 11 straight years.
The main factor driving the dividend increase is SL Green's confidence in the recovery of the New York City office market. CFO Matt DiLiberto stated that: "New York City is in the midst of a broad and palpable recovery and we are very proud that our performance has provided us the opportunity to increase our ordinary dividend for the eleventh year in a row." He also said that "our thesis that New York City is the most resilient market in the country remains intact and we look forward to continuing to generate meaningful returns to our stockholders."
The company reported evidence of that recovery in the third quarter. It recorded $1.78 per share of funds from operations (FFO) during the quarter, up from $1.75 per share in the year-ago period. One of the drivers was a 3.6% increase in same-store net operating income during the quarter.
Giving its investors extra-special treatment
In addition to increasing its ordinary dividend, SL Green is paying a special dividend of $2.4392 per share. However, it will pay it entirely in stock. Further, the company intends to enact a reverse stock split to mitigate any dilution.
This is the second straight year the company declared a special dividend. It used the same method of paying it in shares and offsetting the dilution with a reverse stock split.
The driving factor behind the special-dividend payment is the extraordinary gains on asset sales the company achieved this year. Those sales boosted its taxable income. Because of that, SL Green had to increase its dividend to comply with IRS guidelines of paying out 90% of its taxable net income.
By paying this special dividend in stock and then completing a reverse split, the company (and its shareholders) will avoid paying taxes on the income from the asset sale. This move will also allow SL Green to retain the cash to fund developments, acquisitions, and share repurchases.
SL Green has been capitalizing on strong institutional-investor demand for high-quality office investments. During the third quarter, the company closed the sale of 400 East 57th Street for $135.5 million and a 49% interest in 220 East 42nd Street for $790.1 million. Meanwhile, earlier deals included selling a 25% interest in Tower 46 for a gross valuation of $275 million, interests in two residential properties for a gross valuation of more than $1 billion, and 635-641 Sixth Avenue for $325 million.
These deals generated cash the company used to create more shareholder value. For example, it closed the acquisition of 1591-1597 Broadway for $121 million in the third quarter and 690 Madison Avenue, which previously served as collateral for debt and preferred equity investments. The company also repurchased another 3.8 million shares in the third quarter. It now bought back $3.2 billion of stock under its $3.5 billion repurchase program.
Still creating value while the market recovers
SL Green has done an excellent job navigating the pandemic. It took advantage of opportunities to cash in on the value of its portfolio while making smart moves to preserve the value it has unlocked through a creative special dividend and subsequent reverse split to offset the tax implications. That sets it up to continue growing shareholder value and dividends as the office-market recovery thesis plays out.
