What You Need To Know Before Investing In SL Green Realty Corp. (NYSE:SLG)
SL Green Realty Corp. is a US$6.7b mid-cap, real estate investment trust (REIT) based in New York, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of SLG is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess SLG.
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REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of SLG’s daily operations. For SLG, its FFO of US$442m makes up 56% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether SLG has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take SLG to pay off its debt using its income from its main business activities, and gives us an insight into SLG’s ability to service its borrowings. With a ratio of 7.9%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SLG 13 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
Next, interest coverage ratio shows how many times SLG’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 1.98x, SLG is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at SLG's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In SLG’s case its P/FFO is 15.17x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
Next Steps:
As a REIT, SL Green Realty offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in SLG, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for SLG’s future growth? Take a look at our free research report of analyst consensus for SLG’s outlook.
Valuation: What is SLG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SLG is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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