Many analysts have applauded real estate investment trusts for being cautious with their late-cycle capital allocation, but they are split about the value of share buybacks as part of those strategies.
Some REITs have aggressively repurchased shares in recent months, and stock buybacks were frequently discussed during the 2017 year-end earnings season. REIT stocks have been in a slump for months, despite managements' best efforts to combat investor perceptions of softness in property types. To be sure, investors may have good reason to discount the healthcare and retail segments, where companies have assumed a defensive posture — guarding and reorganizing the homefront rather than advancing on new frontiers. But there is a rough consensus that the market is over-discounting REITs as a group.
According to Baird analyst Dave Rodgers, share repurchasing is particularly common when a stable, or slightly soft, industry is "substantially" mispriced. Companies in a struggling industry want to preserve cash, while companies in rapidly growing industries want to invest it. Most of the largest 100 U.S. REITs by market capitalization repurchased stock in 2017, according to S&P Global Market Intelligence data.
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On SL Green Realty Corp.'s Jan. 25 earnings call, management hinted at the possibility of expanding its already aggressive $1.5 billion share repurchase plan. The New York City-focused office REIT was the largest repurchaser in 2017, buying back 8.25% of its outstanding shares, and is expected to buy back at least $500 million worth of stock in the first half of 2018 with proceeds from joint venture deals and asset sales. An analyst asked on the call if there were a "theoretical limit" to such activity this year.
"We will, of course, continue to take advantage of this market dynamic by selling mature assets and joint venturing value-add assets in order to generate proceeds for reinvestment and leverage-neutral stock buybacks," CEO Marc Holliday said.
For Rodgers, SL Green's aggressive share repurchasing is a logical move. New York City office fundamentals are relatively stable; occupancy and effective rents are about flat. External growth prospects are limited in number, and pricey where available.
However, Rodgers does not generally advocate that REITs repurchase stock. Financial metrics may be improved, and short-term investors may get to take advantage of the higher stock price that usually attends a buyback, but the maneuver does not materially change the fundamentals of the business and there are often better uses for the capital, in his view. Management teams generally should be sourcing and executing on external opportunities, not investing in the company's own balance sheet, he said.
"The gains on the right side [of the balance sheet], to me, mean nothing. ... Show your skills and strategy on the left side of the balance sheet," he said.
Mizuho Securities USA analyst Haendel St. Juste, for his part, thinks most REITs should have buyback programs in place, particularly those that operate in markets where attractive external growth prospects are scarce. Indeed, stock buybacks should be more of a priority today for many REITs, he said.
"If you have the balance sheet, and no near-term maturities, the capacity to do it, and your stock is trading at a big discount, why not? It's an opportunity to capitalize on that arbitrage and create shareholder value," he said.
The weakness in retail REIT stocks stemming from investor concerns about online platforms' encroachment on brick-and-mortar sales has primed that segment for repurchases, according to St. Juste, who noted that many strip center companies recently have implemented buyback programs. Paradoxically, though, the weakness in retail has made asset sales more difficult and less rewarding, so those companies may have trouble funding the repurchases.
"I certainly think that if you're running your company and your balance sheet long-term in a very prudent, shareholder-friendly, efficient way, then stock buybacks are always on the menu," he said. "It should always be a tool at your disposal, and if you're keeping your balance sheet in order, you should be able to capitalize."
Retail Properties of America Inc., a shopping center REIT, and Spirit Realty Capital Inc., a net-lease landlord with a retail focus, were, after SL Green, the most aggressive share repurchasers in 2017, buying back 7.50% and 7.48% of their respective common shares outstanding as of the end of the year, according to S&P Global data. SBA Communications Corp., Colony NorthStar Inc., Macerich Co., Piedmont Office Realty Trust Inc. and Columbia Property Trust Inc. were also relatively active with buybacks.


