The COVID-19 crisis has certainly made investors in office real estate investment trusts (REITs) somewhat concerned, given that the work-at-home model has passed its test. As we move through the second-quarter earnings season, many CEOs across a broad range of industries are remarking that their companies were able to adapt to remote work without any major problems. It certainly makes one wonder whether companies can save money by downsizing office space, especially in expensive markets.
Investors in SL Green Realty (SLG +5.78%), which owns office space in one of the most expensive markets on the planet, New York City, have to wonder what its tenants are thinking.
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Despite the pandemic, tenants are making rent
SL Green recently announced its second-quarter earnings and put some perspective on what it is seeing out there. One number stood out: Through the pandemic to date, the company has collected 96% of gross billings. This is even more impressive when you consider that retail is a part of that number. Customers are definitely taking longer to pay, but the pace of collections has been improving each month. Retail will be a drag on collections until New York fully opens, tourism returns, and consumers become more confident.
The demand for office space remains
On the subject of office leases, the company said on its conference call that it signed 280,000 square feet of office space, raised $510 million in capital, and sold two buildings during the second quarter. So, despite a pandemic and the pain in the financial markets, there is still demand for Manhattan office space. While summer is generally slow for office REITs in general, most of SL Green's clients intend to get to 50% on-site staffing after Labor Day. Note that SL Green is already at close to 100% on-site staffing. The company said its tenants are discussing work-from-home more as an option for people than a definitive change in strategy. Many tenants reportedly admitted seeing productivity and efficiency declines, and the company doesn't think the work-from-home experiment is going to make a serious dent in the 400-million-square-foot marketplace.
The company is not remotely in danger of failing
CEO Marc Holliday attributed the company's accomplishments to the fact that SL Green has almost 100% of its workforce at its headquarters at 420 Lexington Ave. and its satellite offices. The company is in a pretty secure position, given its focus on creditworthy tenants and longer-term leases (its average lease term is nine years). In terms of the company's financials, Holliday had this to say on the conference call:
We had cash liquidity of over $1 billion at quarter-end. We have a manageable debt maturity schedule with less than 8% debt maturity in the next 18 months. We have modest lease expirations of under 10% for the balance of this year and throughout all of 2021. Our asset base of premier properties have all been substantially improved under our ownership such that the mandatory capital needs over the next 18 months are really quite modest. And as I mentioned, our rent collection is at the top of the industry.
SL Green is buying back stock
The company suspended share buybacks in March but reinstated them at the end of May. SL Green did put out guidance on funds from operations (FFO) per share for the year at $6.60 to $7.10 per share, compared to $7 a year ago. This means the current $3.54 dividend is well covered. At Tuesday morning's prices, that works out to a 7.5% dividend yield.
While it is too early to dismiss the theory that office tenants will want to escape Manhattan for the suburbs -- at least in the short term -- that doesn't seem be happening right now. Another outbreak of COVID-19 could change minds. It is too early to get excited about office REITs, but so far the fears of a wholesale rejection of Manhattan office space aren't coming to fruition.
