Shares of SL Green Realty (SLG 9.93%) have tumbled more than 40% from their peak this year. That sell-off has pushed the office-focused real estate investment trust's (REIT) dividend yield up over 7.7%. That's significantly above the REIT sector's 3.5% average and even further above the 1.6% dividend yield offered by the S&P 500.
The REIT believes that the significant decline in its stock price has it trading at an unbelievably cheap valuation. Here's what management had to say about the stock price on its second-quarter conference call.
Cheap any way you slice it
SL Green's CFO, Matt DiLiberto, stated on the call that "the share price is extremely cheap." He added: "I hear the term stupid cheap, but that probably doesn't even scratch the surface as we now trade at the equivalent value of just a handful of our assets and a shocking 50%-plus discount to the Street's net asset value, not ours, which we know is a conservative view of value."
SL Green ran through its net asset value last year at its Analyst Day. At the time, the stock was around $70 a share (it's currently below $50). That implied the company traded at a 7.8% cap rate and valued its office portfolio at $474 per square foot. That was well below the 4.75%-5.25% cap rate range and $707 to $781 price per square foot of comparable office sales. If SL Green's stock traded near those metrics, it would be between $115 to $130 a share.
Meanwhile, shares are also cheap on a cash flow basis. The CFO noted that the company expects its funds from operations (FFO) to be in the range of $6.70 to $7.00 per share this year, implying it trades for around seven times its FFO. That's significantly cheaper than other office REITs, many of which sell for more than 10 times their 2022 FFO estimate. That low valuation is why SL Green offers a nearly 8%-yielding dividend, which is well above the office sector's average of less than 5%.
Will the low stock price drive the company's strategy?
Those comments about the stock price led analysts on the call to ask whether SL Green was considering making any wholesale strategy changes. CEO Marc Holiday addressed those questions by stating: "We're driven by the business plan. The stock price is going to be where it's going to be today, six months from now, 12 months from now, and we have to execute into that."
He noted that the company is opportunistic. It will sell assets when opportunities arise and use that cash to repurchase shares and repay debt. It will also continue building its asset management business by bringing joint venture partners to co-own assets. However, Holiday stated, "I just don't think you're going to see us change that business plan, which we think is the right plan for the assets and our long-term program that we have to develop an asset management company." He also said, "The plan we're on is to take a very measured approach here and just accomplish the goals on the timelines we've set out, which we think is the right way to do it."
So, while management might not like where its stock currently trades, they're not planning to do anything drastic to try and boost its value. Management believes that the current measured approach of waiting for the right opportunities to sell assets and grow its asset management business will create more value for investors in the long run.
Get paid well while you wait
SL Green's management team believes the market isn't giving the company anywhere near enough credit for the underlying value of its assets. Despite that view, they don't plan to make wholesale changes to boost the stock price because they believe their current strategy will ultimately create the most value for investors. While that means investors need to be patient, they're getting paid very well as they wait for the market to eventually recognize this value, thanks to its high dividend yield.