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Key Factors to Drive SL Green's (SLG) Earnings This Season

Zacks Equity Research

SL Green Realty Corp. SLG is slated to report fourth-quarter and full-year 2018 results on Jan 23, after the market closes. The company’s quarterly results will likely reflect year-over-year decline in revenues, while its funds from operations (FFO) per share is anticipated to have recorded growth.

In the last reported quarter, this New York office landlord reported AFFO of $1.69 which came in line with the Zacks Consensus Estimate. Results reflect a year-over-year improvement in same-store cash net operating income (NOI). Yet, revenues from escalation and reimbursement witnessed a steep decline.

Over the preceding four quarters, the company surpassed the Zacks Consensus Estimate in two occasions and met in the remaining two. It delivered average positive surprise of 0.30% during this period. The graph below depicts this surprise history:

SL Green Realty Corporation Price and EPS Surprise

SL Green Realty Corporation Price and EPS Surprise | SL Green Realty Corporation Quote

Factors to Consider

The U.S. office real estate market is gaining traction on the back of economic improvement and recovery in the job market. Particularly, as the economy revives, existing business grows and therefore, corporate sectors seek expansion, renting more space to accommodate the increased workforce. Also, amid healthy growth in demand for office spaces, office landlords can raise rents for properties.

Per a study by the commercial real estate services firm — CBRE Group CBRE — the fourth-quarter office vacancy rate declined to its lowest level since 2011 by 10 basis points (bps) to 12.6%. Further, job growth boosted annual net absorption to 58.3 million square feet of space — the highest since 2015. 

These encouraging statistics are expected to have driven significant leasing activity, and occupancy levels for the SL Green’s New York and Manhattan portfolios. In December, the company announced a series of transactions that strengthened its office portfolio.

The office landlord signed four transactions for 177,081 square feet of space at 2 Herald Square, achieving more than 93% occupancy at the building. At One Vanderbilt, the company’s ground-up development, 52% of office space was leased.

Amid these, for fourth-quarter 2018, net rental revenues from the company’s properties will likely be around $223 million, reflecting a marginal increase from the prior-quarter tally. Also, the Zacks Consensus Estimate for fourth-quarter property operating revenues is currently pinned at $254 million, reflecting an increase from $251 million reported in the previous quarter.

Additionally, non-strategic dispositions have provided this REIT with significant dry powder to fund share buybacks, long-term core asset acquisitions, and investment in debt and preferred equities. In fact, per Moody’s Investors Service, over the last four quarters, SL Green has made significant efforts to shed its suburban office footprint by nearly 50% in terms of space.  

Encouragingly, over the past month, the Zacks Consensus Estimate for the fourth-quarter FFO per share has been revised marginally upward to $1.72. This reflects year-over-year growth of 7.5%.

Earnings Whispers

Here is what our quantitative model predicts:

SL Green has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for SL Green is +0.75%.

Zacks Rank: It currently carries a Zacks Rank #3.

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Omega Healthcare Investors, Inc. OHI, slated to release fourth-quarter results on Feb 11, has an Earnings ESP of +0.26% and a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Equity Residential EQR, scheduled to release earnings on Jan 29, has an Earnings ESP of +0.82% and a Zacks Rank #2 (Buy).

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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