SL Green Realty Corp. (SLG) was formed in 1980; it is an integrated real estate investment trust (REIT) that is focused on Manhattan commercial properties, notes Ben Reynolds, editor of Sure Dividend's Top 10 REITs.
It is Manhattan’s largest office landlord, with 73 buildings totaling 35 million square feet. The pandemic has hurt several companies that are tenants of SLG.
Manhattan has one of the highest vacancy rates of office space, with only half of employees at their desks. This has caused an unprecedented tenant-friendly environment and challenges to the business of SLG, but we expect the REIT to recover fully. The omicron variant initially raised concerns over the return of employees to desks, but these concerns have now subsided.
In the fourth quarter of 2021, the same-store net operating income grew 2.9% over the prior year’s quarter but occupancy slipped sequentially from 93.2% to 93.0% and funds from operations (FFO) per share dipped 3% over the prior year’s quarter, from $1.56 to $1.52. As a result, the REIT missed the analysts’ consensus by $0.03.
Safety & Dividend Risk Analysis
SLG has 42 years of experience in Manhattan, so it has great expertise in the area. It raised its dividend by 2.5% in late 2021 and has raised its dividend for 11 consecutive years. It is now offering a 5.0% dividend yield. It also declared a special 3.2% dividend with a 12/14/21 ex-dividend date.
SLG is currently under pressure due to the pandemic, which has caused a work from home (WFH) trend. However, the REIT has one of the strongest balance sheets in the REIT universe, as its net debt of $5.0 billion is just 10 times its annual FFO. This is reflected in the strong BBB credit rating of SLG.
Thanks to its financial strength, the REIT can endure the crisis and emerge stronger whenever the pandemic subsides. Its 5.0% dividend is well covered with a payout ratio of 57%.
Growth, Value & Expected Total Return Analysis
SLG benefits from reliable growth in rental rates in one of the most popular commercial areas in the world, Manhattan. The REIT pursues growth by acquiring attractive properties and raising rental rates in its existing properties. It signs multi-year contracts (7-15 years) with its tenants in order to secure reliable cash flows.
SLG has grown its funds from operations per share at a 2.9% average annual rate in the last decade. We expect 5% annual earnings growth over the next five years off this year’s low level, which has resulted from the pandemic.
Based on expected 2022 FFO per share of $6.60, SLG trades for a price-to-FFO ratio (P/FFO) of 11.2. Our fair value estimate for SLG is a P/FFO of 13.
An expanding P/FFO multiple could boost shareholder returns by 3.0% per year over the next five years. When the 5.0% earnings growth and 5.0% dividend yield are also added, we expect total returns of 12.0% per year over the next five years.