12/07/21 07:08 AM EST

REITS DAILY BRIEF | 12.7.21 | (SLG)

Takeaway: Field notes from SLG investor conference

Ticker: SLG

Subsector: CBD Office

Headline: Further pivot away from office ownership, for an office owner

Another marathon investor conference from Long Bench name SLG, which was fascinating on several fronts this year. There is always a lot to absorb so we will try to parse through what we thought were the most meaningful points among the ~290 slides. Overall, one of the more positive and interesting SLG IC's we have attended over the last 6 years:

First, the most glaring point from the conference to us was a very clear move away from a focus on larger office asset ownership stakes, and potentially accelerating a move to a more "asset light" model which has several long-term implications. The frustration with the discount to "value" was palpable and we would expect further action, stopping short of saying that a full take-private is likely. We think future SLG could gradually look very different from legacy SLG and other REITs over time:

Potential to become more of an office "asset manager" of choice, or AUM/fee/promote-based company over time. This has basically already been happening to some extent (selling down stakes in OVA and OMA, trimming the portfolio overall, etc.), but there was an interesting slide in the presentation (Figure 1 below) on "growing AUM" and highlighting (1) third-party foreign capital sources entering the market for U.S. real estate and (2) SLG's existing relative scale in AUM. There are several longer-term implications for this potential transition - attaching a value to the platform, improving ROICs, taxes born either at the corporate or individual level as assets are sold, potentially de-REITing, and also the fact that asset managers typically trade at lower multiples than REITs broadly (although not necessarily in the case of NYC CBD office). All else the same, it sounded to us like an outright take-private is not in the cards unless SLG received an exceptional offer; the plan appeared to us to be to continue to shrink the % interest in office assets and arb the public/private discount.
Making efforts in NYC affordable housing on the margin.
Potentially bidding for a down-state casino license.
SLG was apparently "orange-pilled" by Stoneridge/NYDIG which is a ~100ksf tenant at OVA, and bought a $10 million interest in a Bitcoin fund in 2Q21 held on-balance sheet. SLG has also been hearing from tenants about an interest in paying rent using crypto and is investigating setting up the infrastructure to do so. We get the small allocation to the balance sheet, but the idea of transacting in Bitcoin likely needs to be facilitated via Lightning etc. given the high transaction (taxes, fees) and frictional costs of using the base chain and converting to USD. Ultimately, SLG has to pay its employees, lenders and shareholders in USD, at least for now. Regardless, this is the first REIT to our knowledge that has invested or taken an interest in Bitcoin which is fascinating. Just knowing from experience that there is always a lot of "tail chasing" in the space, we are pretty sure other REIT names will look to do something similar over time. We did a double-take when Figure 2 below was shown on screen, and it was interesting to see a relatively muted/skeptical reaction around the room filled with traditional finance/real estate types while we were furiously Tweeting out the news.

The annual discussion around discount to NAV came up again (Figure 3 below), but we continue to ask "what is the catalyst to close that discount?" The easiest answer is a gradual sell-down of the assets to arb the public/private spread and buyback stock. One thing that we think is VERY important to consider - in a true conversion to the private market transaction costs such banker fees, legal fees, transfer taxes, debt breakage costs, severance and ultimate capital gains (either corporate or personal) can consume a very large percentage of the asset value (up to ~10% or more in in some cases for NYC specifically). So just using applying ~10% and doing some simple math equates to a ~6-6.5% implied cap rate implied for Manhattan office, so not as wide as the slide would imply for a true move to private market. But we cede the point... there is still an arbitrage.
Finally, as expected FFO guidance came in about +$0.10/share above $6.75 consensus as per FactSet at the midpoint, with the building blocks shown in Figure 4 below (range of $6.70 to $7.00). SLG will likely continue to buyback stock, and like last year will execute a reverse split after dividending out shares of stock as part of the January 2022 special dividend so that the per share metrics wind up in the same place pre-special. This allows SLG to retain capital in the structure. The question is whether the IRS will allow this treatment beyond the 2021 tax year as we move away from the pandemic.