Published on July 20th, 2021 by Bob Ciura
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 4.7% yield at the moment. SL Green also pays a monthly dividend. There are currently fewer than 60 monthly dividend stocks.
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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 $5.3 billion and is Manhattan’s largest office landlord, with 84 buildings totaling 38 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 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.
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 business has actually held up well, considering the very challenging operating environment over the past year. In late April, SLG reported (4/21/2021) financial results for the first quarter of fiscal 2021. Its same–store net operating income decreased–1.4% over the prior year’s quarter but its occupancy rate improved from 93.4% at the end of the previous quarter to 94.2%.
Its funds from operations (FFO) per share decreased –17% over the prior year’s quarter, from $2.08 to $1.73, primarily due to asset divestments.
The REIT somewhat improved its collection rates in the quarter, collecting 98.0% of total billings for office, 85.0% of billings for retail and 95.3% of total billings. SLG has been significantly affected by the coronavirus crisis, which has caused a recession and thus has hurt several companies that are tenants of SLG. Occupancy of office space in 10 large cities was just 24% in late March.
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.
SLG is currently under pressure due to the pandemic, which has caused a severe recession and a work–from–home trend. However, it has one of the strongest balance sheets for a REIT, as its net debt of $5.8 billion is 12 times its annual funds from operations. This helps explain the strong BBB credit rating of SLG. Thanks to its financial strength, the REIT can endure the ongoing crisis and emerge stronger as the pandemic subsides.
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. At a current monthly rate of $0.3033 per share, SL Green has an annualized dividend payout of $3.64 per share, representing a 4.7% current yield.
Even better, the dividend looks safe even with the COVID-19 headwinds. We expect SL Green to produce $6.50 of funds-from-operation in 2021, giving the stock a projected dividend payout ratio of 56%. This is a 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 10 consecutive years.
In December 2020 SLG raised its dividend by 2.8%, and also announced a special dividend of $1.6967 per share, due to its asset dispositions in 2020.
The stock also appears to be undervalued from a valuation perspective. Using the current share price of ~$77 and expected funds-from-operation for the year, SL Green trades with a forward price-earnings ratio of 11.9. 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 13 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, 5% expected FFO-per-share growth and the 4.7% dividend yield result in total expected returns of 11.5% per year over the next five years.
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, the REIT has maintained solid occupancy and rent collection in recent quarters.
SL Green also has long-term 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 for value and income investors.