SL Green Realty Is a High Yield Stock for the Economic Reopening Trade

The COVID-19 crisis presented a set of very unique, even unprecedented challenges for a variety of businesses. One of the industries most impacted was certainly real estate, and in particular, REITs with monthly dividend payouts. With the pandemic creating situations where tens of millions of people that formerly went into an office everyday were suddenly working from their residences, the outlook for office space REITs was bleak. However, even with the Delta variant of COVID-19 making its way through the U.S. and other places around the world, office REITs have largely rebounded from their COVID-induced issues. One such office REIT that we see as attractive for a variety of reasons is SL Green Realty . Let's take a look at the trust's business, how it has recovered from COVID-19, and its all-important dividend safety. Business Overview SL Green is Manhattan's largest office landlord, and is focused on acquiring, managing, and maximizing the value of its commercial properties. SL Green purposefully concentrates its portfolio in Manhattan, which is in stark contrast to many REITs that deliberately spread out their geographic exposure. This has certain benefits, such as deep knowledge of the local market, but also has an obvious concentration risk. The trust owns interests in 77 buildings totaling more than 35 million square feet. SLG directly owns about 27 million square feet of office space, and indirectly owns the balance through secured debt and preferred equity investments. The company was founded in 1997, employs about 800 people, generates just over $700 million in annual revenue, and trades with a market capitalization of $5.1 billion, making it one of the larger office REITs in the market today. Recent Earnings SL Green reported its second quarter earnings on July 21st. Net income came to $1.51 per share in Q2, which was nearly double the 76 cents produced in the same period a year ago, a period that was heavily impacted by COVID-19's early stages. Net income included a $108 million gain, or $1.47 per share, due to the sale of two properties during the quarter. On a funds-from-operations basis, or FFO, SL Green produced $1.60 per share in Q2, which was slightly lower than the $1.70 from the year-ago period. Both periods included lease termination income, with a larger benefit in this year's Q2, while ongoing operations produced lower FFO year-over-year. Same-store cash net operating income, or NOI, was down 3.7% year-over-year for Q2, and for the first half of the year, was off by 2.4%. NOI normalizes for things like lease termination income. The trust signed 558 thousand square feet of new leases in the second quarter, and 910 thousand in the first half of the year. Lease rates were 1.1% lower than the year-ago period in Q2, and 1.7% lower for the first half on the same spaces, indicating a small measure of pricing weakness on the part of landlords. This is not unexpected given the unprecedented circumstances presented by COVID-19. The trust said it had same-store office occupancy of 93.6% as of the end of the June quarter, which included leases that were signed but not yet commenced, so SL Green has some runway for improvement there. SLG has been busy recycling its capital, including the recent sales of 635-641 Sixth Avenue, 605 West 42nd Street, and a partial sale of 220 East 42nd. The trust acquired 461 Fifth Avenue with a small portion of those proceeds, but used some to buy back stock. Indeed, the trust has repurchased four million shares thus far this year, pursuant to its $3.5 billion share repurchase plan. We expect SL Green to produce $6.50 in FFO-per-share this year, a modest figure compared to the past few years of results as the trust continues to recover from COVID-19. Recovering From COVID-19 The company was obviously heavily impacted by COVID-19. After all, it is highly concentrated in a single market, and further, is highly concentrated in the one type of real estate that very suddenly became far less valuable than it was prior to the pandemic. However, SL Green's premier properties, years of expertise in the Manhattan office space market, and very strong balance sheet have allowed it to not only survive, but produce record FFO-per-share last year. The trust is still very much in the midst of recovery when it comes to its growth outlook, but strong progress has been made, not the least of which is its nearly-94% occupancy rate, a rate that is quite robust considering how exposed SLG is to office space. We see the trust's capital recycling moves as prudent and paving the way for the trust's future growth, and continued recovery from COVID-19. Part of this that is of particular interest to shareholders is the stock's ample dividend. Dividend Safety SL Green managed to not only continue to pay its dividend during the crisis, but it continued to raise the dividend as well, an impressive feat given the circumstances. SLG now has a decade-long streak of dividend increases, and its average annual increase over that time period is a robust 20%. The stock is also sporting a 5.1% current yield, so SL Green is a very strong dividend stock. However, current yield and high rates of growth don't mean much if the dividend isn't safe. That's another area where the company shines, given that we see the payout as very safe today, despite the continued challenges of the office space sector of REITs. The trust's payout ratio has been very low for the past decade, both on an absolute basis, but also in comparison to its peers, which tend to have 80%+ payout ratios. SL Green, on the other hand, currently has a payout ratio of just 56% despite a forecast decline in FFO-per-share for this year. That leaves the trust with an extraordinarily safe payout among its REIT peers, and we see no plausible cause for a dividend cut on the horizon. Indeed, we believe SLG will continue to raise its ample dividend for years to come, making it a great stock for both dividend growth potential and current yield. Finally, while office space wasn't the place to be in 2020, SL Green has shown that if investors select the best operators, it can still be a lucrative way to gain exposure to real estate. The company has rebounded from COVID-19, continues to produce strong FFO, pays a very nice dividend yield, and that dividend yield looks very safe. We like SL Green for these reasons and more, and recommend it as a buy.

SL Green Realty Is a High Yield Stock for the Economic Reopening Trade

SLG has shown that if investors select the best operators, it can still be a lucrative way to gain exposure to real estate.

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