Ben Reynolds and the editorial team at Sure Dividend have just launched a new monthly advisory service entitled Top 10 REITs. Here, we conclude a 5-part series that counts down their initial five favorite REITs.
Real estate investment trusts — or REITs, for short — can be fantastic securities for generating meaningful portfolio income. REITs widely offer higher dividend yields than the average stock.
The Top 10 REITs service ranks more than 110 REITs every month and analyzes the Top 10 REIT buys with 4%+ yields based on expected total returns and safety.
Read Top REITs Part 1: Four Corners Property Trust here…
Read Top REITs Part 2: CareTrust REIT here…
Read Top REITs Part 3: Alpine Income Property Trust here…
Top REITs Part 4: Omega Healthcare Investors here…
SL Green Realty Corp. (SLG) — our top-ranked REIT — was formed in 1980. It is an integrated real estate investment trust (REIT) that is focused on acquiring, managing, and maximizing the value of Manhattan commercial properties.
It is Manhattan’s largest office landlord, with 77 buildings totaling 35 million square feet. The pandemic has hurt several companies that are tenants of SLG. New York has one of the lowest rates of occupancy of office space in the U.S., with 19.5% occupancy right now.
his has caused an unprecedented tenant-friendly environment and challenges to the business of SLG, but we expect the REIT to eventually fully recover from the pandemic.
SLG reported its financial results for the second quarter of 2021 on 7/21/21. Its same- store net operating income fell 2.7% over last year’s quarter and its occupancy rate slipped sequentially from 94.2% to 93.6%.
Its funds from operations (FFO) per share dipped 6% but only due to higher lease termination income in last year’s quarter. Excluding this factor, FFO per share would have edged up 2%.
SLG has 40 years of experience in Manhattan and hence it has great expertise in the area. It has raised its dividend for 10 consecutive years and is currently offering a 5.3% dividend yield.
SLG is currently under pressure due to the pandemic, which has caused a work-from-home trend. However, the REIT has one of the strongest balance sheets in the REIT universe, as its net debt of $5.6 billion is just 12 times its annual funds from operations. This is reflected in the strong BBB credit rating of SLG.
Thanks to its financial strength, the REIT can endure the ongoing crisis and emerge stronger whenever the pandemic subsides. It can also maintain its attractive 5.3% dividend, which is well covered with a payout ratio of 56%. SLG is thus suitable for income-oriented investors who can wait patiently for the pandemic to subside.
SLG benefits from reliable growth in rental rates in one of the most popular commercial areas in the world, Manhattan. The REIT pursues growth by acquiring attractive properties and raising rental rates in its existing properties. It signs multi-year contracts (7-15 years) with its tenants in order to secure reliable cash flows.
SLG has grown its funds from operations per share at a 4.5% average annual rate in the last decade and at a 2.2% annual rate in the last five years. We expect 5% annual earnings growth over the next five years off this year’s somewhat low level, which has resulted from the pandemic.
Based on expected 2021 earnings-per-share of $6.50, SLG trades for a price-to-earnings ratio (P/E) of 10.6. Our fair value estimate for SLG is a P/E of 13. An expanding P/E multiple could boost shareholder returns by 4.3% per year over the next five years. When the 5.0% earnings growth and 5.3% dividend yield are also added, we expect total annual returns of 13.4% per year over the next five years.
