Real Estate Firms Betting Their Stock Has Bottomed With Buybacks. Will The Strategy Work?
Vornado Realty Trust pivoted its strategy in the first quarter when it implemented a stock buyback program and suspended dividend payments. But what was a new step for the New York-based real estate investment trust has been quite the popular tactic among its peers.
Out of 30 publicly traded real estate companies analyzed by S&P Dow Jones Indices, most of which were REITs, 21 companies repurchased shares during at least one of the last five quarters, according to data shared with Bisnow.
The purpose of a buyback is to improve a stock’s worth by concentrating value in fewer outstanding shares and by buying a percentage at a perceived discount. But buybacks aren’t without drawbacks, as they require companies to use cash that they could put toward other purposes or take on new debt, and whether the intended result matches reality is up for debate.
“Let's say [a REIT is] trading at 80% of net asset value, or a 20% discount to net asset value,” Fitch Ratings Senior Director Chris Wimmer said. “If they go out and purchase the shares, they're basically buying real estate at 80 cents on the dollar — they just happen to be buying their own real estate. And it lowers the share count, so it is more supportive of their equity.”
By reducing the number of outstanding shares, remaining stockholders gain a greater stake in the company.
“Theoretically, you who own shares in the company now own that much more,” S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt said.
Buybacks among the real estate companies S&P Dow Jones Indices tracked totaled $1.14B in Q1 2022, during which CBRE alone repurchased $399.3M in shares.
Repurchases among those companies slowed to $526.4M in Q1 2023, but it is still a popular tactic.
Apartment REIT Essex Property Trust more than tripled its buyback activity between Q4 and Q1 from $31.8M to $95.7M, while Host Hotels & Resorts nearly doubled its repurchases in the same period from $27M to $50M. Regency Centers, Kimco Realty and AvalonBay Communities, which each totaled less than $100K of buybacks in Q4, jumped to $27.1M, $16.1M and $11.4M, respectively, in the first three months of 2023.
In the broader market, Russell 3000 Index companies revealed plans to buy back $600B worth of shares so far in 2023 after setting the record in 2022 with $1.05T in repurchases completed, The Wall Street Journal reported.
If earnings hold steady after a buyback, earnings per share rises, Silverblatt said, but relatively small repurchase programs may not move the needle. He said a 4% buyback is a benchmark of significance, as it can improve a company’s price-to-earnings ratio and other metrics analysts pore over.
“History has proven that unless buybacks are done in size, typically the buybacks do not cause a material rerating in the shares,” said Mizuho Americas Managing Director of Real Estate Equities Vikram Malhotra, who covers a variety of REITs.
Malhotra gave the example of SL Green, which he said took an aggressive approach several years ago of selling properties to buy back stock. He said this made sense in theory, as they could monetize assets at relatively high valuations and buy back stock at lower valuations.
“But it never seemed to stabilize the stock price,” he said. “It may have stabilized it for very short periods, but over several quarters, couple of year context, it really does not stabilize it. And I think other corporates watching that just said, 'We're just going to pause. We don't need to do buybacks in a big way.’”
SL Green Chief Financial Officer Matt DiLiberto, speaking on the REIT's Q2 2022 earnings call, said it changed its strategy that quarter to stop repurchasing shares and to instead focus on repaying debt, given the effects of rising interest rates. But he emphasized that it still viewed stock buybacks as an attractive opportunity at the time.
Malhotra said companies should consider buybacks only if they can do so in a leverage-neutral manner, a line most REITs have been able to toe.
“We're not aware of any activity that is detrimental in ratings that we've assigned,” Wimmer said. “We know there is some share buyback activity in the sector, but it isn't a rating consideration for us at this point.”
Even if companies aren’t overleveraging themselves to repurchase shares, there is the question of timing.
The attractiveness of a buyback program comes from shares trading at a discount relative to net asset value. But stock prices are often depressed because a company has reduced cash flow, and buying back stock requires money that could further weaken its balance sheet.
“I would question the use of cash as well as where you're getting the cash from,” Silverblatt said of buybacks generally in the present environment. “If you're financing it, what's it costing you? How long can you continue to finance?”
In Vornado’s case, the REIT had resisted buybacks for years, Chairman and CEO Steven Roth said during the company’s Q1 earnings call. But with its stock price falling some 35% between its Q4 and Q1 dividend announcements, the company saw better value in its discounted stock than in discounted asset acquisitions, prompting its board to authorize a $200M buyback program.
“We will focus on our stock at the expense of buying a building here and there,” Roth said during the May 2 call. “If we buy a building that used to be $1K a foot for $700 a foot, that potential pales in relation to the value that we see in our stock.”
Vornado declined Bisnow’s interview request.
Under the right circumstances, a buyback program can demonstrate a company’s view that there is nowhere to go but up.
“There's an aspect of signaling that management teams think their stock has bottomed,” Malhotra said.
But that doesn’t make it the best use of a company’s money moving forward, he said.
“Cash will be king, and I think maintaining a lower-levered balance sheet, a cleaner balance sheet will be the best use of capital at this point rather than trying to buy back stocks,” Malhotra said.