SL Green Realty Corp. SLG, Manhattan’s largest office landlord, is well-poised to benefit from its portfolio of high-quality office properties located in the high-barrier to entry real estate market of New York amid the recovering office real-estate market.
After a dismal environment in the office real-estate market, office real estate investment trusts (REITs), including SL Green, are likely to benefit from a combination of office-using job growth, higher space utilization and expansion of technology, financial and media companies.
With a gradual return of the workforce to offices, SLG has been witnessing robust leasing activity. It signed 76 office leases for its Manhattan office portfolio spanning 1,009,811 square feet during the first half of 2022. This is likely to boost SLG’s occupancy levels and rental revenues in the upcoming period.
Moreover, its diversified tenant base with a strong credit profile lowers the risk associated with dependency on single-industry tenants and assures stable rental revenues for the company.
SL Green follows an opportunistic investment policy to enhance its overall portfolio quality. Through this, it divests the mature and non-core assets and utilizes the proceeds to fund development projects and share buybacks.
This September, it entered into an agreement to dispose of its 414,317 square feet of vacant office leasehold condominium units at 885 Third Avenue, popularly known as “The Lipstick Building,” to Memorial Sloan Kettering Cancer Center for $300.4 million. The transaction is expected to close in the fourth quarter of 2022, subject to the satisfaction of closing conditions.
SL Green also enjoys solid balance-sheet strength with ample liquidity. It exited the second quarter of 2022 with $1.3 billion of liquidity and a fixed charge coverage for the trailing 12 months of 3.03X. This gives its enough financial flexibility to bank on future growth opportunities.
Solid dividend payouts are arguably the biggest attraction for REIT investors, and SLG remains committed to that. In December 2021, it increased its annual ordinary dividend by 2.5%, resulting in an annual dividend of $3.73 per share. Also, in the past five years, SLG has increased its dividend five times and has a five-year annualized dividend growth rate of 2.60%, which seems encouraging.
However, a rise in the supply of office properties in SL Green’s markets and intense competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from its tenants, limits SLG’s ability to increase rents and/or backfill tenant move-outs and vacancies.
A majority of SL Green’s operations is concentrated in midtown Manhattan, NY. Consequently, its concentration of assets in this particular geographic region makes it susceptible to the economic conditions prevailing in New York City.
Also, a hike in interest rates is likely to increase borrowing costs, affecting SLG’s ability to purchase or develop real estate.
Shares of SLG, carrying a Zacks Rank #3 (Hold), have lost 15.2% in the quarter-to-date period compared with the industry’s decline of 10.5%.
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Stocks to Consider
Some better-ranked stocks from the REIT sector are SBA Communications SBAC, Extra Space Storage EXR and Xenia Hotels & Resorts XHR, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for SBA Communications’ current-year funds from operations (FFO) per share has moved marginally northward in the past month to $12.17.
The Zacks Consensus Estimate for Extra Space Storage’s ongoing year’s FFO per share has been raised marginally upward over the past week to $8.49.
The Zacks Consensus Estimate for Xenia Hotels & Resorts’ 2022 FFO per share has moved 15.2% upward in the past two months to $1.59.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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