Office real estate investment trusts (REITs) have been under a cloud since the early days of the pandemic. The initial fear was that their tenants would go out of business and leave them with the lease costs.
That generally didn't happen, but the work-from-home model worked so well that it has become a permanent part of the landscape. While companies would prefer most of their employees to work on site, employers don't really have the leverage in this labor market to push the issue.
This situation is particularly acute in places like New York City, where many people have long commutes from the suburbs. How is the biggest office landlord in New York City, SL Green Realty (SLG -3.95%), faring in this environment?
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The office landlord for New York City
SL Green is the biggest commercial landlord in New York City, owning 59 properties containing 27.7 million square feet of office, retail, and residential space. The past two years have been a challenge for the REIT because many of its tenants (especially in the tech space) are reducing their footprint as many of their employees choose to work from home. This has been offset somewhat by improvements from tenants in the financial services sector.
On the second-quarter earnings conference call, chief financial officer Matt DiLiberto said: "I hear the term 'stupid cheap,' but that probably doesn't even scratch the surface, as we now trade at the equivalent value of just a handful of our assets and a shocking 50-plus percent discount to the Street's [net asset value], not ours, which we know is a conservative view of value."
SL Green's discount price
The company is guiding for funds from operations (FFO) per share to come in between $6.70 and $7, though it indicated that it probably would come in at the lower end of that range. In 2021, the company earned FFO per share of $6.80. This puts its stock trading at a multiple of 6.6 times expected 2022 FFO per share. The company is trading at a substantial discount to book value per share, and -- as Diliberto said on the call -- it trades at 50% of the Street estimate of net asset value per share.
The knock on SL Green is its debt burden. The company has about $3.9 billion in long-term and revolving debt. The capital markets are relatively inhospitable to debt issuance at the moment. On the conference call, the company said it plans to repay $300 million of maturing debt with asset sales, and then use a short-term bridge loan to repay another $500 million, which will then be repaid with more asset sales.
The company also has some joint-venture debt, however, that is non-recourse to the company, which means that SL Green assets cannot be taken in the event of a joint-venture bankruptcy. FFO in 2021 came in at $481 million, and gross interest expense was $145 million, so interest expense was covered by 3.3 times, which is a reasonably decent coverage ratio.
The dividend looks safe
SL Green is certainly an out-of-favor stock. It is down some 40% year to date and is trading with a dividend yield of 8%. The company's annual dividend is $3.73 per share, which is more than amply covered by the company's FFO guidance of $6.70 to $7 per share. While some of the company's asset sales might decrease future FFO the company is also opening new properties which will likely offset some of that. Note that Wall Street analysts expect full-year 2023 earnings per share to be more or less flat with 2022. The dividend looks safe and the stock's dividend yield is close to the high it hit during the pandemic.
SLG dividend yield. Data by YCharts.
SL Green is nowhere near any sort of financial distress, but the fear is that the work-from-home movement combined with an exodus of companies from New York City will lead to depressed occupancy and overcapacity. As such, it will probably remain under a cloud for the near term until we see its current occupancy rate of 90.6% return to its pre-pandemic level of 94.3%.
Investors might have to wait a while for this to occur. There aren't a lot of business catalysts that would significantly change anyone's view on the stock for a while, but the valuation is at the bottom of its historical range and the dividend yield is near the top. The company appears to represent value, although it will take a while for sentiment to turn around.
