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Is It Wise to Retain SL Green (SLG) Stock in Your Portfolio?

SL Green Realty Corp.’s SLG portfolio of high-quality and well-amenitized office properties in the New York City poises it well to ride the growth curve. Its opportunistic investment policy augurs well. However, an elevated supply of office properties in its markets and high interest rates make us apprehensive.

What’s Aiding It?

SLG is witnessing healthy leasing demand for its properties as tenants’ demand for premium office spaces continues to grow. In the first quarter, it signed 60 office leases for its Manhattan office portfolio, spanning around 633,660 square feet.

Given that office-space demand in the upcoming period is likely to be driven by de-densification to allow higher square footage per office worker, SLG remain well-positioned to navigate the challenging environment.

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Moreover, this office real estate investment trust (REIT) enjoys a diversified tenant base, with long-term leases and a strong credit profile. This lowers the risk associated with dependency on single-industry tenants and assures stable rental revenues for the company.

To enhance its overall portfolio quality, the company follows an opportunistic investment policy.  It divests mature and non-core assets, and utilizes the proceeds to fund development projects and share buybacks. Such efforts highlight its prudent capital-management practices and will relieve pressure from its balance sheet.

In January 2024, SL Green closed the sale of a retail condominium, along with its partner, at 717 Fifth Avenue for $963.0 million. The transaction generated net proceeds of $27 million, which was used for corporate debt repayment.

Over the years, the large-scale sub-urban asset sale has helped it to narrow focus on the Manhattan market as well as retain premium and highest-growth assets in the portfolio.

Analysts seem bullish on this Zacks Rank #3 (Hold) company. The Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share has been risen 20.8% over the past month to $7.33.

Shares of the company have gained 14.4% in the past three months against the industry’s 1.3% decline.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

What’s Hurting SLG?

Competition from industry peers may limit the company’s ability to retain tenants as relatively higher rents denting its pricing power. The elevated supply of office properties is likely to fuel competition and adversely impact SL Green’s ability to backfill tenant move-outs and vacancies, hurting occupancy in the near term.

Further, given the high interest rate environment, SLG may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. Our estimate suggests the company’s net interest expenses to increase 10.3% from the year-earlier levels in 2024. Moreover, with high interest rates still in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Lamar Advertising LAMR and Cousins Properties CUZ, 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 consensus estimate for LAMR’s current-year FFO per share has moved 3.7% northward over the past month to $8.03.

The Zacks Consensus Estimate for CUZ’s 2024 FFO per share has risen marginally upward over the past week to $2.61.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.

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Lamar Advertising Company (LAMR) : Free Stock Analysis Report

Cousins Properties Incorporated (CUZ) : Free Stock Analysis Report

SL Green Realty Corporation (SLG) : Free Stock Analysis Report

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Zacks Investment Research