Is Now A Good Time To Buy SL Green Realty?

A recent report by MSCI Real Assets warned that the volume of troubled real estate assets has escalated to almost $64 billion in the first quarter of 2023, an increase of 10% from the fourth quarter of 2022. An additional $155 billion of commercial property assets are on the brink of distress, according to MSCI. Office buildings in particular account for $43 billion of potential distressed properties, more than any other subsector of the real estate investment trust (REIT) industry.

The share prices of office REITs have been crushed since the beginning of 2022. Along with the decimation of prices has come an increase in dividend yields. Three questions for income investors now are:

1. Have price declines reached their full extent as Wall Street looks forward to further rate hikes, a possible recession and reduced demand for office space?
2. Do the dividends appear to be safe, given the extended yields and dividend cuts seen within the past year?
3. Is there any recent news that would appear to act as a catalyst for a turnaround in these stocks?

Take a look at one bellwether office REIT — SL Green Realty Corp. SLG — and decide whether now would be a good time to purchase the largest landlord of office buildings in New York City.

The market has a long history of overselling REITs when facing a potential recession, providing an incredible opportunity for investors to "lock in" massive yields. Gain access to insights from Benzinga's real estate research team with the free Weekly REIT Report. 

As of Dec. 31, SL Green Realty held interests in 59 buildings totaling 32 million square feet. Of those interests, 44 were properties and 15 were debt investments. Many investors like owning SL Green Realty for its monthly paying dividend.

Most of its buildings are higher class and more in demand than those of other New York City landlords. An example is the mixed-use Giorgio Armani Residences on Madison Avenue:

The most recent earnings report for SL Green was on April 19. Funds from operations (FFO) of $1.53 per share beat the estimates by $0.13 but was down from $1.65 in in the first quarter of 2022. Revenue of $174.59 million rose 27.93% from $136.48 million in the first quarter of 2022. Same-store office occupancy was ahead of company expectations at 90.2% as of March 31.

On June 5, SL Green announced that it had signed 31 office leases totaling nearly 300,000 square feet within the last 60 days for a 2023 total of 803,819 square feet as well as a leasing pipeline in excess of 1 million square feet.

“Leasing velocity continues to improve,” SL Green Executive Vice President Steven Durels said. “Buildings that are located near public transportation that are well-amenitized, that provide healthy work environments and are managed by high-quality, well-capitalized operators are realizing leasing success.”

But recent negative statements from Berkshire Hathaway Inc.’s Charlie Munger, Tesla Inc. CEO Elon Musk and others about a potential financial crash and “troubled office buildings” have hurt SL Green’s share price this year. Another negative for SL Green was the ultra-high short interest of 27.7%, making it difficult for shares to move higher.

But the short sellers were about to take a hit. On June 26, SL Green Realty announced the sale of a 49.99% interest in its building at 245 Park Ave. to an affiliate of Mori Trust Co., Ltd. with a gross asset valuation of $2 billion.

The news sent the stock flying throughout the morning, as short sellers scrambled to lock in rapidly dissolving profits. By 10 a.m., shares of SL Green Realty were up almost 18% from the previous trading day.

The chart below shows the recent rebound of the share price. Monday’s engulfing bullish candlestick takes out nine previous trading days of price pullback, but some very long-term resistance at the 200-day moving average hangs above it at $31.50.

Performance

The following chart shows the total return (including dividends) of SL Green Realty from different time frames, as of June 23. 

It’s obvious from this chart that SL Green Realty has been a poor long-term performer for most of the times frames given. But basically, those numbers have been skewed by the beating its shares have taken since the beginning of 2020 when the office REITs were absolutely crushed by COVID-19. Add to that the inflation of 2021 to 2023 and massive interest rate hikes by the Federal Reserve, and it’s no wonder share prices have declined so much. However, it’s also true that SL Green was $144 per share in 2015 and had already been declining quite a bit even before COVID-19 struck the U.S.

 Analysts’ Views

 Analysts seem to have mixed feelings about SL Green Realty.

On June 22, Argus Research A6 Quantitative upgraded SL Green Realty from Sell to Hold with a target price of $21. This was the first upgrade on SL Green Realty since BMO Capital Markets upgraded it from Market Perform to Outperform with a $30 price target in April.

But on June 14, Barclays analyst Anthony Powell reiterated an Underweight rating with a $22 price target. Similarly, on June 13, Wells Fargo analyst Blaine Heck maintained an Equal-Weight rating on SL Green, while lowering the price target from $26 to $24.

Dividends

For several months there has been a question of whether SL Green might slash its monthly dividend. But on June 16, SL Green declared its next monthly dividend, $0.2708, and it was in line with its previous dividend. The dividend is payable on July 17 to shareholders as of June 30, with a June 29 ex-dividend date. In addition, the forward FFO of $5.46 easily covers the $3.25 annual dividend with a payout ratio of 59.5%.

The dividend was cut by 12.86% from $0.311 to $0.271 in December. There was another slight dividend cut from $0.312371 in November to $0.311 in January 2022. The five-year dividend history is not good at all. The biggest dividend cut occurred during the March 2020 COVID-19 crisis, when the it was slashed from $0.93962 to $0.313207.

Summary

Investors need to decide whether SL Green Realty has hit rock bottom yet or if there are more share price declines to come. Risks are abundant and include:

•  Recession driving tenant companies into bankruptcy
• Reduction of asset values
•  Higher interest rates and continuing inflation
•  Continuing patterns of employees working from home
• Further cuts to the dividend, given the double-digit yield
• A lack of geographic diversity

 Despite the risks, one thing is certain — SL Green could be a far better value play for long-term investors at $27 than it’s been in decades. The last time shares traded at 2023 prices was in 2009. In addition, the 59.5% forward payout ratio makes SL Green a far safer dividend payer than many others in the office REIT subsector.

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