SL Green Realty Corp’s SLG high-quality office portfolio in the New York market has been witnessing strong leasing activity. However, amid rising supply and persistently elevated vacancy rates in the office real estate sector, near-term tenant move outs is a concern.
Notably, the company has an enviable footprint and dominance in the large and high-barrier to entry New York real estate market. This has enabled SL Green to enjoy high occupancy at its portfolio.
In fact, it reported second-quarter 2019 funds from operations (FFO) per share of $1.82, surpassing the Zacks Consensus Estimate of $1.73. Results reflected strong leasing activity in the company’s Manhattan and Suburban portfolios. Further, total revenues for the quarter improved year over year.
Also, in July, the company signed a lease with Ulta Beauty, Inc., the largest national beauty retailer for 12,040 square feet of space at 2 Herald Square. With this lease, the property’s retail space is now 100% leased. The property is located in one of Manhattan’s coveted retail submarkets and enjoys high foot traffic.
Notably, the company follows an opportunistic investment policy, per which it is using sale proceeds from non-core asset sales proceeds to fund development projects and share buybacks, as well as invest in debt and preferred equities. These efforts will enhance its overall portfolio and fuel long-term growth.
In fact, SL Green repurchased 1.3 million shares of common stock in first-half 2019, under the company’s $2.5-billion share buyback program. This, along with continued dividend hikes, boosts investors’ confidence in the stock.
However, office landlords have been battling with weak pricing power as supply growth remains at cycle highs. The company also faces intense competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from its tenants. This restricts SL Green’s ability to attract and retain tenants at relatively higher rents than its competitors.
In fact, amid higher leasing costs and elevated supply of office assets, it will be challenging for SL Green to backfill near-term tenant move-outs.
Moreover, prevalent softness in the retail sector will affect SL Green’s leasing activities. Mall traffic has been declining significantly amid rapid increase in online sales, forcing retailers to opt for store closures.
Furthermore, geographic concentration of assets is another concern for the company. In fact, performance of the company is susceptible to the condition of the New York City economy as well as the market for office space in midtown Manhattan.
Over the past three months, shares of this Zacks Rank #3 (Hold) company have declined 8%, underperforming the industry’s rally of 5.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nonetheless, the trend in estimate revisions of 2019 FFO per share indicates a favorable outlook for the company. In fact, the Zacks Consensus Estimate for 2019 FFO per share moved marginally north over the past month, suggesting year-over-year growth of 4.5%.
Stocks to Consider
Extra Space Storage Inc EXR currently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for 2019 FFO per share has been revised marginally upward to $4.84 over the past month.
Alexandria Real Estate Equities, Inc. ARE holds a Zacks Rank of 2, at present. The Zacks Consensus Estimate for the current-year FFO per share remained unchanged at $6.98 in the past month.
Public Storage PSA carries a Zacks Rank of 2, presently. The Zacks Consensus Estimate for FFO per share for the ongoing year has been revised marginally upward to $10.73 over the past two months.
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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