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Monthly Dividend Stock In Focus: SL Green Realty Corp

Updated on March 9th, 2023 by Jonathan Weber

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 10.2% yield at the moment. SL Green also pays a monthly dividend. There are currently fewer than 84 monthly dividend stocks.

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Sometimes, a very high yield such as the one SL Green is offering today can be a warning sign to investors that there is a problem with the underlying company. But on the other hand, the currently pretty high dividend yield offers a substantial boost to expected total returns.

In addition to the high yield, SL Green also has some growth potential, 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.

Business Overview

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 $2.2 billion and is Manhattan’s largest office landlord, with more than 40 buildings totaling close to 30 million square feet.

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 is also one of the largest employers in the sector. This should allow SL Green an opportunity to capitalize on this growing field with its strategically located properties.

SL Green is very active in the market, buying and selling properties regularly in order to optimize its portfolio:

Source: SL Green presentation

As of its most recent investor day presentation, SL Green owned a total of 44 properties with a total footprint of 29.3 million square feet:

Source: SL Green presentation

The combined revenues of the trust’s tenants are around the $1 billion level. SL Green has compounded funds-from-operation at a rate of around 3% over the last ten years.

Shares of SL Green generated total returns of roughly negative 50% in 2022, as underlying operational results were okay, but since the market sold off SL Green aggressively due to rising interest rates that have compressed the valuations for most REITs. The stock is down just over 7% from the start of this year. Office REITs have been hit especially hard in this environment as employees are working more from home relative to pre-pandemic levels, which has hurt demand for office REITs.

While the short-term outlook has continued headwinds, SL Green has room to grow as well.

Growth Prospects

SL Green’s business has performed reasonably well over the last couple of years, considering the challenging operating environment in that time frame. In late January, SLG reported financial results for the fourth quarter of fiscal 2022. Its same-store net operating income increased by 3.3% over the prior year’s quarter, but its occupancy rate decreased from 93.0% at the end of the previous year’s quarter to 91.2%.

Its funds from operations-per-share decreased by 4% over the prior year’s quarter, from $1.52 to $1.46, due in part to asset divestments, while higher interest rates also were a headwind for the company.

SL Green has been significantly affected by the coronavirus crisis, which has hurt several companies that are tenants of SLG. Occupancy of office space in New York is near historic lows as demand has waned, at least to some degree, due to increased working from home.

On the other hand, SL Green benefits from its trophy assets, such as 450 Park Avenue and 245 Park Avenue, where the company can demand high rents from tenants and where demand is still high. The company’s regular asset sales of non-core assets seek to strengthen the portfolio further which should help with demand and thus occupancy rates in the long run.

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 2021. At a current monthly rate of $0.2708 per share, SL Green has an annualized dividend payout of $3.25 per share, representing a very high 10.2% current yield.

While the dividend has been reduced recently, it looks sustainable at the current level, even considering interest rate headwinds and the still ongoing headwinds from increased working from home for this office REIT. We expect SL Green to produce $5.40 of funds-from-operation in 2023 on a per-share basis, giving the stock a projected dividend payout ratio of 60%. This is a relatively low payout ratio for a REIT. The trust has seemed to manage its business well, and management is experienced.

The stock also appears to be undervalued from a valuation perspective. Using the current share price of ~$32 and expected funds-from-operation for the year, SL Green trades with a forward price-earnings ratio of just 5.9. Shares have traded with an average price-to-funds-from-operation of 14.0 over the last decade. We do not expect that SL Green will trade at a multiple this high in the foreseeable future, but there still is considerable upside potential.

Even giving the stock a lower fair value estimate of 9-10 times FFO due to current headwinds, the stock is substantially undervalued which could result in strong return tailwinds due to multiple expansion. The combination of an expanding P/FFO multiple, some FFO-per-share growth, and the 10% dividend yield result in total expected returns of deep in the double-digits per year over the next five years, we believe.

Final Thoughts

SL Green is a high-yielding REIT that is facing headwinds to its business. The COVID-19 pandemic has caused increased working from home, which was a headwind for occupancy rates, and higher interest rates are a headwind for SL Green as well.

On the other hand, SL Green also has some long-term growth potential given that it is concentrated in a high-demand area of New York City and since it continues to upgrade its portfolio over time via regular transactions. The very high dividend yield and low valuation could allow for highly compelling total returns going forward, although SL Green can’t be described as an especially low-risk stock due to the aforementioned headwinds for its business.

Don’t miss the resources below for more monthly dividend stock investing research.

And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.

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