SL Green Realty Corp. (SLG) — a REIT formed in 1980 — is Manhattan’s largest office landlord, with 62 buildings totaling 34 million square feet, notes Ben Reynolds, editor of Top Ten REITs.
The pandemic has hurt several companies that are tenants of SLG. Occupancy of office space in Manhattan remains near historic lows, causing an unprecedented tenant-friendly environment and challenges to the business of SLG.
The REIT has offered average concessions of 9 months of free rent in its new leases this year. On the bright side, this metric improved to 5 months in the third quarter. We expect the REIT to recover.
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 years in a row. Thanks to its financial strength, SLG can endure the crisis and emerge stronger whenever the effect of the pandemic fades. Its 9.3% dividend is well covered with a payout ratio of 57%.
SLG benefits from reliable growth in rental rates in one of the most popular commercial areas in the world. The REIT pursues growth by acquiring attractive properties and raising rental rates in its existing properties. It normally signs multi-year contracts (7-15 years) with its tenants 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 growth on a per unit basis 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 6.1, which is much lower than its 4-year average of 11.4. An expanding P/FFO multiple could boost shareholder returns by 13.5% per year over the next five years. When the 5.0% earnings growth and 9.3% dividend are also added, we expect total returns of 23.6% per year over the next five years.
