The remote work trend has bedeviled the office real estate sector since early 2020. The COVID-19 pandemic provided us with proof that work-from-home models can work, and employees generally like them. Now, the U.S. labor market is the tightest it has been since the late 1960s, based on statistics like the unemployment rate and initial jobless claims. This has given large numbers of employees more leverage to demand the option of working remotely or under a hybrid model, rather than having to be on-site consistently.
The New York City office market in particular has struggled since the pandemic began, and office real estate investment trust (REIT) SL Green Realty (SLG -0.53%) got pinched as a result. As the pandemic eases and workers start returning to the office, some improvement can be seen. Are things turning around for the REIT, and is its dividend safe?
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SL Green is Manhattan's landlord
SL Green is known as Manhattan's landlord -- it holds an interest in 61 buildings totaling 33 million square feet. About 43% of SL Green's office space is leased to companies in the financial services sector, with lesser shares going to tenants in tech, media, advertising, information, and legal. Last year was notably difficult for the financial services industry, as underwriting volumes have fallen.
The New York City office market had an especially hard time as some companies left the area due to its high taxes and costs. That said, if a business is in the New York City area, it is easiest for employees living in the city's suburbs to commute into Manhattan. It's harder to commute from suburb to suburb. So if an employer were to relocate its offices from Manhattan to Long Island or New Jersey, for example, it would seriously inconvenience some of its employees.
SL Green's occupancy rates remain below their pre-pandemic levels. In the fourth quarter of 2019, SL Green's occupancy stood at 94.3%. That metric was down to 91.2% at the end of 2020 but had rebounded to 93% by the end of 2021. Unfortunately, that was the high water mark. As of the end of 2022, occupancy slipped to 91.2%.
SL Green recently cut its dividend
At the end of last year, SL Green cut its monthly dividend from $0.311 per share to $0.271 per share. This was done to conserve cash, repay debt, and maintain flexibility in a rising interest rate environment. Even after that payout cut, the company still sports an 8.5% yield at the current share price, which is better than average among office REITs.
For 2022, SL Green brought in funds from operations (FFO) of $6.64 per share, compared to $6.80 per share in 2021. REITs generally use the FFO number as their key earnings metric rather than the more commonly used earnings per share. This is because depreciation and amortization are such big components of their expenses. Since those are non-cash charges, they don't affect cash flows. As a result, GAAP (generally accepted accounting principles) earnings understate the cash-flow-generating capacity of a REIT.
SL Green's initial 2023 guidance range for FFO was $5.30 per share to $5.60 per share. That would be a decline of 18% at the midpoint.
The stock is trading cheap for a reason
Currently, SL Green stock trades at 7.3 times guided FFO per share. This is a cheap multiple, but the REIT deserves to trade cheaply since its FFO per share has been declining. The dividend appears safe at its current level, given that it was recently cut and is well-covered by FFO. SL Green does have an outsized dividend yield of 8.8%, which is attractive. However, if FFO keeps declining, those payouts will be at risk of further cuts. Overall, SL Green will struggle until its occupancy numbers start going back up.
