Real estate investment trusts historically have not been zealous repurchasers of their own shares in the public market, but the activity picked up near the end of 2018, and one analyst thinks the group should be doing more of it in 2019.
Public REITs bought back about $1.96 billion worth of common shares during the 2018 fourth quarter, nearly triple the amount repurchased in the three months prior and a 23% jump year over year, according to S&P Global Market Intelligence data.
In 2018, REITs repurchased $6.27 billion of common shares, a 7.8% increase compared to the amount repurchased in 2017.
Buyback activity tapered off for most REITs during the first quarter of 2019, totaling about $940.5 million. Brookfield Property REIT Inc. repurchased more than a third of the total, buying back $224.5 million of its class B-1 stock as well as $95 million of its class A common shares.
Industry observers diverge on the appeal and efficacy of buybacks for REITs, even late in the economic cycle when such activity typically accelerates. Building and maintaining real estate is a capital-intensive business, and REITs, beyond that, have dividends to pay.
Stephen Boyd, senior director for U.S. real estate and leisure at Fitch Ratings, said some level of buyback activity is to be expected in the group, especially when share prices are low. But he called repurchasing shares "an unnatural act" in general in the space. On balance, REITs are net issuers of equity, he said, and they should use capital to grow their business with accretive external investments. The last thing a REIT wants to do is buy back shares, only to turn around and have to raise equity capital again to make a strategic purchase.
"I do think it shows some preference for equity over debt, which, from a credit standpoint, we view somewhat negatively," Boyd said of buybacks in an interview. "It's kind of a gift to equity."
Boyd said buybacks make more sense today in office than in retail, perhaps the two most challenged REIT subsectors at present — the former because of changing workplace space preferences, and the latter because of disruption from e-commerce. Office valuations are still attractive in the private market, but retail landlords need capital to redevelop outdated malls and shopping centers and prepare them for the next generation of retailer tenants.
Kevin Brown, an equity REIT analyst at Morningstar, said he is in favor of REITs repurchasing shares, as the act represents a vote of confidence on the part of management in the health of a company. In an interview, he said more REITs should execute buybacks as long as the circumstances are right — namely, a stock is trading at least 10% below net asset value, the company's balance sheet is in good order with low debt, and management has reviewed all alternatives.
"It's something you do when you feel comfortable about your position," Brown said.
While REITs could use available capital to undertake new development or make acquisitions, late-cycle market conditions may demand another course. Brown noted that construction costs are high, and cap rates are low across several sectors. Much of the low-hanging fruit this cycle has been plucked, and returns are growing weaker.
"Companies should be more willing to consider buybacks as a way to create value for shareholders," he said.
Office REIT Piedmont Office Realty Trust Inc. repurchased more than 17 million common shares during the recent fiscal year — approximately 11.9% of the REIT's total shares outstanding, the largest percentage of any REIT — at an average price of $18.29 apiece.
Colony Capital Inc. followed, repurchasing 11.3% of its common shares during the year. In February 2018, the REIT's board of directors authorized the repurchase of up to $300 million of its outstanding common shares. After completing the program, the company's board of directors authorized the repurchase of an additional $300 million on May 23, 2018. During the first quarter of 2019, Colony Capital repurchased an additional 652,311 shares of its class A common stock, and as of May 7, 2019, the REIT's repurchase plan had $246.7 million of remaining capacity.
SL Green Realty Corp. upped the capacity of its share repurchase program by $1 billion during 2018, announcing a $500 million increase on June 14 and another $500 million increase on Nov. 30. Total capacity for the program currently sits at $2.5 billion. During 2018, the office-focused REIT repurchased 9.7 million common shares under the program at an average price of $96.22 per share, as well as an additional 397,783 shares during the first quarter of 2019 at $86.07 apiece.
On Feb. 16, 2018, SBA Communications Corp.'s board of directors authorized a $1 billion stock repurchase plan, replacing its prior plan authorized the year prior. During 2018, the communications REIT repurchased close to 5 million common shares at an average price of $159.87 each, leaving $204.5 million of remaining capacity on the program. During the three months ended March 31, 2019, SBA Communications did not repurchase any shares of its common stock.
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