Despite the coronavirus crisis, the S&P 500 has rallied 25% in the last 12 months, to new all-time highs. As a result, it has become especially hard for income-oriented investors to identify stocks with attractive and safe dividend yields.
SL Green Realty (SLG) is a bright exception, as it has a low valuation and a high dividend yield above 5%. The company also has a long history of raising its dividend, making it a top retirement stock with a wide margin of safety.
SL Green Realty is an integrated real estate investment trust (REIT) that is focused on acquiring, managing, and maximizing the value of Manhattan commercial properties. It is the largest office landlord in Manhattan, with 93 buildings totaling 41 million square feet.
SL Green Realty is facing a strong headwind due to the pandemic, which has caused a severe recession and thus it has greatly hurt many companies that are tenants of the REIT. Occupancy of office space in Manhattan was reported to be less than 15% a few months ago. This has caused an unprecedented tenant-friendly environment and has put SL Green Realty in a somewhat weak position in the lease renewal negotiations with its tenants.
On the bright side, SL Green Realty exhibited resilient performance in 2020. Its funds from operations per share edged up 1.7%, from $6.99 in 2019 to $7.11 in 2020. This is undoubtedly resilient performance amid one of the fiercest downturns in the 40-year history of the company.
On the other hand, the effect of the pandemic on SL Green Realty is likely to be more pronounced this year due to the low current occupancy rate (93.4% at the end of 2020) and the weak position of the REIT in the renewal of its leases. Due to the continued effect of the pandemic on its business, SL Green Realty is likely to incur a 9% decrease in its funds from operations this year, from $7.11 to $6.50.
While the pandemic will continue to weigh on the results of SL Green Realty in the first half of the year, it is likely to subside at the second half of the year thanks to the massive vaccination program underway. As a result, SL Green Realty is likely to begin to recover later this year and return to its multi-year growth trajectory.
SL Green Realty benefits from the reliable long-term growth in rental rates in one of the most popular commercial areas in the world, Manhattan. The REIT achieves growth by acquiring attractive properties and raising rental rates in its existing properties. In addition, it signs multi-year contracts (7-15 years) with its tenants in order to secure reliable cash flows. It has thus grown its funds from operations per share at a 4.5% average annual rate over the last decade. We expect SL Green Realty to grow its funds from operations by approximately 5% per year on average over the next five years off this year’s low comparison base.
During the last 40 years, SL Green Realty has been operating, investing and developing several high-quality commercial properties in Manhattan. As a result, it has developed great expertise in the area. This constitutes a meaningful competitive advantage.
Another competitive advantage is the exceptionally strong balance sheet, which helps the REIT endure downturns easily and emerge stronger from them. SL Green Realty has a BBB credit rating, which is one of the strongest ratings in the REIT universe. It can thus easily endure the coronavirus crisis and recover when the pandemic subsides.
SL Green Realty is currently offering a 5.2% dividend yield. Due to the rich valuation of the broad market at its all-time highs, S&P is currently offering just a 1.5% dividend yield. When a stock offers a yield above 5% in the current environment, its dividend is usually at the risk of being cut.
However, this is not the case for SL Green Realty. The REIT has a healthy payout ratio of 56% and sports one of the strongest balance sheets in its sector. As a result, SL Green Realty is offering a 5.2% dividend, with a wide margin of safety. The market has begun to realize this, as the yield of the stock has dropped from about 6.0% in recent months to 5.2% now. Therefore, investors should lock in the 5.2% yield of the stock before it drops further.
SL Green is going through a downturn in its business due to the pandemic. However, the pandemic is likely to subside at the second half of this year thanks to the ongoing vaccination program. As a result, SL Green is likely to return to its long-term growth trajectory next year. With a high dividend yield of 5.2% and steady dividend increases, SL Green is a very attractive stock for income-focused investors looking to live off dividends such as retirees.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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