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SL Green (SLG) to Post Q2 Earnings: What's in the Offing?

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SL Green Realty Corp. SLG is slated to report second-quarter 2021 results on Jul 21, after market close. The company’s results might display year-over-year declines in funds from operations (FFO) per share and revenues.

In the last reported quarter, this New York office landlord delivered a surprise of 9.49%. Results reflected better-than-expected net rental revenues. Also, cost-control measures aided bottom-line growth.

The company surpassed the Zacks Consensus Estimate in all of the trailing four quarters, the average beat being 8.53%.

Let’s see how things have shaped up prior to this announcement.

Factors at Play

SL Green’s New York City office portfolio performance is likely to have improved during the second quarter, aided by vaccine roll-outs, relaxations of pandemic-related restrictions on capacity limit and social distancing, and a gradual revival of mobility of residents in the area. These suggest a return of the workforce to offices and other places of business, and are reasons to be optimistic about the company’s second-quarter results.

Despite the negative impact of the pandemic-induced job losses and the remote-working dynamics that have been still hurting the U.S. office real estate sector, SL Green’s leasing pipeline has been robust. In June, the company inked three leases comprising both new and expansion leases, aggregating 124,000 square feet of space at One Vanderbilt Avenue. With the lease, the skyline-defining tower in the center of East Midtown is now 89% leased.

Further, the company’s focus to maintain a diversified tenant base and long-term leases to tenants with strong credit are anticipated to have helped generate stable and recurring rental revenues during the June-end quarter.

Additionally, SL Green has been divesting its mature and non-core assets, including residential properties in a tax-efficient manner. Large-scale sub-urban asset sale has helped it narrow its focus on the Manhattan market as well as retain premium and the highest-growth assets in the portfolio. Such prudent capital-management practices are likely to have supported its growth in the second quarter.

However, the pandemic’s impact on the labor markets continued to overwhelm the U.S. office real estate market in the quarter to be reported, resulting in negative net absorption and an increase in vacancy levels. While the U.S. economy slashed nearly three million office-using jobs last year in March and April, the United States added back only 1.7 million in 2020 and another 389,000 office-using jobs during the first half of this year. The remote-working wave is still continuing and though the office-using employment is recovering, it is still below the pre-pandemic level.

Specifically, going by a Cushman & Wakefield CWK report, the U.S. office sector witnessed negative net absorption of 38.5 million square feet, marking its fifth consecutive quarter of negative absorption. Also, the vacancy rate increased to 17.2% in the June-end quarter from the prior year’s 13.5%.

Moreover, the demand for the New York City retail space is expected to have been bleak, with no significant turnaround on the horizon for the leisure, hospitality and tourism sectors, which are major drivers for this retail real estate market.

As such during second-quarter 2021, softness in the company’s retail property segment is likely to have eroded its profitability. While rent collections from office tenants have been strong (98% rent collected for first quarter 2021), the same cannot be said for retail tenants (85%).

Amid this, the Zacks Consensus Estimate for second-quarter 2021 net rental revenues is pinned at $152 million, indicating a decline from the prior quarter’s $174 million.

Additionally, the consensus mark for second-quarter 2021 total revenues is pegged at $152 million, calling for a 12.7% year-over-year decline.

Lastly, the company’s activities in the quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate for second-quarter FFO per share has remained unchanged at $1.61 over the past month, suggesting an 8% year-over-year decline.

Here is what our quantitative model predicts:

SL Green does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an FFO 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 -0.09%.

Zacks Rank: It currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

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

American Tower Corporation AMT, slated to release quarterly earnings on Jul 29, has an Earnings ESP of +1.67% and holds a Zacks Rank of 3 at present.

Public Storage PSA, set to report quarterly numbers on Aug 3, currently has an Earnings ESP of +0.62% and carries a Zacks Rank of 3.

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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