Ben Reynolds, editor of Top 10 REITs, looks at a pair of real estate investment trusts that focus on commercial properties on opposite coasts; one is a leader in Manhattan properties, while the other owns real estate in Los Angeles.
SL Green Realty Corp. (SLG) 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 64 buildings totaling 34 million square feet.
SLG has 42 years of experience in Manhattan, so it has great expertise in the area. It raised its dividend by 2.5% in late 2021 and has raised its dividend for 11 years in a row. SLG is currently under pressure due in part to the pandemic, which has caused a work from home trend.
However, SLG has a reasonably strong balance sheet for a REIT, as its net debt of $5.1 billion is just 10 times its annual FFO. This is reflected in the strong BBB credit rating of SLG. Thanks to its financial strength, SLG can endure the crisis and emerge stronger whenever the effect of the pandemic fades. Its 8.1% dividend is well covered with a payout ratio of 57%.
Based on expected 2022 FFO per share of $6.60, SLG trades for a price-to-FFO ratio (P/FFO) of 7.0, which is much lower than its 5-year average of 12.4.
An expanding P/FFO multiple could boost shareholder returns by 12.2% per year over the next five years. When the 5.0% earnings growth and 8.1% dividend are also added, we expect extremely high total returns of 22.1% per year over the next five years.
Douglas Emmett (DEI) is a REIT that was founded in 1971. It is the largest office landlord in Los Angeles and Honolulu, with a 38% average market share of office space in its submarkets.
The REIT generates 86% of its revenue from its office portfolio and 14% of its revenue from its multifamily portfolio. It has approximately 2,700 office leases in its portfolio, with annual revenue of $1 billion.
The markets of Douglas Emmett have the highest barriers to entry among the U.S. gateway markets. New office development in its core L.A. markets is limited due to restrictive zoning laws, density limits, and anti-growth community sentiment. Thanks to these advantage and the healthy payout ratio of 55% of the stock, its 5.3% dividend is safe.
Based on expected 2022 FFO per share of $2.05, the stock trades for a 10-year low price- to-FFO ratio (P/FFO) of 10.2. Our fair value estimate for this REIT is a P/FFO of 15.5.
An expanding P/FFO multiple could boost shareholder returns by 8.6% per year. When added to the expected annual FFO per share growth of 5.0% and the stock’s 5.3% dividend yield, we thus expect total returns of 17.2% per year over the next five years.
