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Is a Beat in the Cards for SL Green (SLG) in Q4 Earnings?

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SL Green Realty Corp. (SLG - Free Report) is slated to report fourth-quarter 2020 and full-year 2020 results on Jan 27, 2021, after market close. The company’s results will likely reflect a year-over-year decline in funds from operations (FFO) per share and revenues for the quarter to be reported.

In the last reported quarter, this New York-office landlord reported FFO per share of $1.80, surpassing the Zacks Consensus Estimate of $1.54. Results reflected growth in same-store cash net operating income (NOI).

The company surpassed the Zacks Consensus Estimate in the preceding four quarters. It reported an earnings surprise of 11.6%, on average, for this period. The graph below depicts the surprise history.

Key Factors to Note

Office occupiers continued to shed their space in fourth-quarter 2020. This decline in demand along with increased supply led to a notable surge in vacancy rates and affected net absorption.

Specifically, going by a Cushman & Wakefield (CWK - Free Report) report, net absorption aggregated negative 43 million square feet, marking the third consecutive quarter of negative absorption. Further, vacancy increased to 15.5% in the December-end quarter from 14.4% in the third quarter. This was the largest vacancy increase in a quarter since first-quarter 2002.

Nonetheless, resilience in asking rents continued to support office real estate fundamentals. In fact, asking rents increased 5.6% to $35.10 per square foot during the fourth quarter.

Despite the negative effect of pandemic-borne job losses and the remote-working dynamics that hindered the U.S. office real estate sector in the fourth quarter of 2020, SL Green continued to make solid strides on its leasing and operational front. This was backed by a shift in preference toward well-located assets.In fact, the company signed 393,056 square feet of Manhattan office leases in the fourth quarter, bringing the year-to-date tally to 1.18 million square feet, as of Dec 7.

Additionally, the office landlord has been unlocking value by delivering its development projects. In fact, since the onset of the pandemic, SL Green has signed seven leases at its iconic skyscraper, One Vanderbilt Avenue.

Ultimately, with solid demand for space in the company’s properties, management had projected Manhattan office leases to be signed before the end of 2020 to be more than 400,000 square feet in the fourth quarter and surpass 1.2 million in the year.

During 2020, SL Green made concerted efforts to shrink its debt and preferred equity (“DPE”) portfolio and reduce focus on the troublesome retail real estate sector, thereby enhancing profitability. In fact, the company sold seven positions in 2020 for $383 million, or 98% of book value. With this, management had anticipated ending 2020 with $1.1 billion in DPE book value and only 2% exposure to retail. This too is expected to have supported the company’s performance.

Nonetheless, rental collections from retail tenants have been low. This along with reduced market rents and muted income from garage parking is likely to have affected revenues. In fact, the Zacks Consensus Estimate for fourth-quarter 2020 revenues is pegged at $171.6 million, suggesting a 21.5% year-over-year decline.

Lastly, the company’s activities during the quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate for fourth-quarter FFO has been revised marginally downward to $1.57 over the past month. Further, it indicates a 12.8% year-over-year decline.

Moreover, the consensus mark for 2020 FFO per share has been revised marginally downward to $7.28, indicating a 1.1% year-over-year improvement. The company guidance for 2020 FFO per share is $6.60-$7.10.  

Key Developments During the Quarter

On Dec 6, SL Green announced a 2.8% hike in its annual ordinary dividend to $3.64 per share. The company will now pay out a monthly dividend of 30.33 cents per share, up from the 29.5 cents paid out in the prior month.The increased dividend will be paid out on Jan 15, 2021, to shareholders of record as of Dec 15, 2020

In addition to the quarterly dividend, SL Green has announced a special dividend with a value of $1.6967 per share, payable on Jan 15, 2021, to shareholders of record as of the record date. Further, the company announced that its board has authorized an increase in the share-repurchase program size by an additional $500 million. This brings the program to a total of $3.5 billion.

What the Zacks Model Predicts

SL Green has 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 +1.53%.

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

Other Stocks That Warrant a Look

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

Healthpeak Properties, Inc. (PEAK - Free Report) , set to report quarterly numbers on Feb 9, currently has an Earnings ESP of +4.40% and a Zacks Rank of 3.

WashREIT (WRE - Free Report) , slated to release quarterly earnings on Feb 11, has an Earnings ESP of +0.59% and a Zacks Rank of 3, at present.

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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