SL Green Realty Corp. SLG, New York City's largest office landlord, has been making concerted efforts to expand in the city’s premium retail locations. This will likely complement the company’s core office and structured finance businesses.
Such an opportunistic investment policy will enhance its overall portfolio. Notably, the company is divesting its non-core assets in a tax-efficient manner, and using the proceeds to fund share buybacks and development projects. In fact, it has executed dispositions and recapitalizations of more than $8 billion, since 2016,which helped boost the company’s cash inflows by more than $2 billion.
Also, with the New York City economy projected to remain robust in the current year, SL Green’s focus on the area is a strategic fit. Understandably, with economic improvement and recovery in the job market, healthy growth in demand for office spaces is anticipated.
With ownership interests in 28.2 million square feet of Manhattan buildings, the company is poised to absorb the upcoming demand for office space. Additionally, it enjoys a balanced lease maturity and a well-laddered debt maturity schedule.
In third-quarter 2018, the company’s adjusted funds from operations (AFFO) of $1.69 per share came in line with the Zacks Consensus Estimate, while net rental revenues of $221.8 million surpassed estimates. Results were buoyed by growth in same-store cash net operating income (NOI).
This real estate investment trust (REIT) is also making efforts to improve shareholder value through its share-repurchase initiatives. After announcing a $1-billion share buyback program in August 2016, additional $500 million was authorized in December 2017 and June 2018, respectively, bringing the tally to $2 billion. Under this program, the company has repurchased a total of 15.7 million shares.
However, the company contends with developers, owners and operators of office properties and other commercial real estate, including sublease space available from its tenants. Furthermore, rising supply of office properties in its markets remains a hurdle. Specifically, stiff competition and rising supply restrict the company’s ability to attract and retain tenants at relatively higher rents and impact occupancy growth. In fact, in the Sep-end quarter, same-store occupancy at the company’s Manhattan portfolio witnessed a sequential decline.
Further, since majority of its assets are located in New York City, performance of SL Green is susceptible to the city’s economic condition, as well as the market for office space in midtown Manhattan.
Additionally, the choppy retail real estate environment affects SL Green’s leasing activities. Mall traffic has been declining significantly amid e-commerce boom, forcing retailers to opt for store closures. This has been affecting demand for retail space, limiting landlords’ pricing power, and resulting in lesser absorption and occupancy.
Shares of this Zacks Rank #3 (Hold) company have underperformed the industry it belongs to, in the past three months. During this period, shares of the company have declined 10.7% compared to the industry’s loss of 2.4%.
Stocks to Consider
A few better-ranked stocks from the REIT industry are Alexandria Real Estate Equities, Inc. ARE, PS Business Parks, Inc. PSB and Boston Properties, Inc. BXP. All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Alexandria Real Estate Equities’ FFO per share estimates for 2018 remained unchanged at $6.61 in 30 days’ time. The company’s 2019 FFO per share is estimated to witness year-over-year growth of 5.07%.
PS Business Parks’ Zacks Consensus Estimate for 2018 FFO per share inched up 1.3% to $6.45 in the past 30 days. Its 2019 FFO per share is expected to climb 2.02% year over year.
Boston Properties’ Zacks Consensus Estimate for the current-year FFO per share has been revised marginally upward to $6.39 in a week’s time. For 2019, the company’s FFO per share is likelyto be up 7.29% year over year.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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