Published on August 20th, 2020 by Nate Parsh
Many investors find high-yielding stocks appealing for the income that they produce. This is why Real Estate Investment Trusts, or REITs, are so popular among dividend growth investors. REITs are required to pass along the majority of income in the form of dividends.
SL Green Realty Corp (SLG) is a good example of a high yielding REIT, as the stock pays a 7%+ yield at the moment. SL Green also pays a monthly dividend. There are currently fewer than 60 monthly dividend stocks.
You can download our full list of monthly dividend stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking the link below:
Sometimes, a high yield can be a warning sign to investors that there is a problem with the underlying company. SL Green, however, appears to be an attractive investment opportunity. In addition to the high yield, SL Green also has solid growth prospects, making it an appealing investment option for both income and growth investors.
This article will analyze the investment prospects of SL Green in further detail.
SL Green is a self-managed REIT that manages, acquires, develops and leases office properties in the New York City Metropolitan area. In fact, the trust is the largest owner of office retail estate in New York City, with the majority of properties in midtown Manhattan. The trust has a market capitalization of $3.4 billion.
The location of properties benefits the trust as more technology and financial companies desire centrally located real estate in the area. While many think of San Francisco as the technology hub in the U.S., New York City recently became the largest employer in the sector. This should allow SL Green an opportunity to capitalize on this growing field with its strategically located properties.
Source: Investor Presentation, slide 2
As of 6/1/2020, SL Green owned a total of 87 properties with a total footprint of 28.7 million square feet. The combined revenues of the trust’s tenants is $1.7 billion. SL Green has an investment grade rating of BBB from Fitch as well. SL Green has compounded funds-from-operation at a rate of 3.7% over the last decade.
Shares of SL Green has been cut almost in half in 2020. The stock is down just under 50% from the start of the year, largely due to the COVID-19 pandemic. Office and retail space REITs have been hit especially hard in this environment as employees are working more from home than the office and consumers have spent much of the last few months practicing social distancing.
While the short-term outlook has continued headwinds, SL Green has room to grow as well.
SL Green’s share price has reacted poorly to the pandemic, but the business has actually held up well considering the circumstances.
Source: Investor Presentation, slide 4
As you can see, office rents were largely collected during the most recent quarter. And the same goes for residential and suburban rents. All three categories have 90%+ rent collection for rents due in April and May..
Retail, not surprisingly, was the weakest of the property types. Less than 55% of rent due in the quarter was received.
While retail will likely be an ongoing issue until the COVID-19 pandemic subsides or social distancing requirements are relaxed, SL Green has seen strength in its other property types. This diversification should help offset weakness in retail going forward.
Aside from being located in a prime spot for office space in New York City, SL Green is in the process of leasing out multiple properties.
Source: Investor Presentation, slide 12
Deals covering more than 715,000 square feet have been delayed as a result of COVID-19, but SL Green has 23 total leases in negotiation or that are ready to be signed for properties in Manhattan. The trust also has another 28 total deals pending, covering nearly 636,000 square feet.
SL Green had an occupancy rate of 95.2% in the second quarter. For comparison purposes, the trust had a 95.5% occupancy rate in the first quarter of the year and a 94.8% occupancy rate in the second quarter of 2019.
This shows that SL Green’s properties remain in high demand even in the face of an uncertain environment.
Dividend and Valuation Analysis
Until recently, SL Green paid a dividend on the more customary quarterly schedule. That changed in 2020 when the trust began paying a monthly dividend in April. So far in 2020, shareholders have received $2.36 in per-share dividends.
Assuming that the monthly dividend payment is maintained through the end of the year, SL Green should distribute $3.54 of dividends per share. SL Green offers a 7.7% dividend yield today. For context, the stock has an average yield of 2.2% since 2010 and has only averaged a yield above 4% for an entire year once (2019) in that time. Today’s yield is also 3.5 times that of the 10-year average yield.
Even better, the dividend looks safe even with the COVID-19 headwinds. Analysts on average expect SL Green to produce $6.87 of funds-from-operation in 2020, giving the stock a projected payout ratio of 52%. This is an incredibly low payout ratio for a REIT. The trust has seemed to manage its business well, which is one reason the dividend has been raised for nine consecutive years. Funds-from-operation have always more than covered the dividend over this period of time.
SL Green’s dividend has increased at an annual rate of more than 24% over the last 10 years, though growth has slowed significantly over the past few years. Despite the slowing growth, the stock offers an extremely high yield.
The stock also appears to be undervalued from a valuation perspective. Using the current share price of ~$45.91 and expected funds-from-operation for the year, SL Green trades with a forward price-earnings ratio of 6.7. Shares have traded with an average price-to-funds-from-operation of 15 over the last decade.
Even giving the stock a lower fair value estimate of 8-9 times FFO due to COVID-19 headwinds, the stock is undervalued which could result in significant returns due to multiple expansion. The combination of an expanding P/FFO multiple and dividends could yield total returns above 12% over the next five years, and potentially more if the company can generate FFO-per-share growth.
SL Green is a high-yielding REIT that is facing headwinds to its business. The COVID-19 pandemic has negatively impacted rent collections for its retail properties. Even so, three out of four property types had very strong rates of rent collection during the second quarter and the occupancy rate remains very high.
SL Green also has growth prospects given that it is concentrated in a high demand area of New York City. This should allow for the occupancy rate to remain high. The trust also has a well-covered dividend and trades at a discounted valuation. For these reasons, SL Green stock is a buy at the current share price.