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Why SL Green Realty (SLG) Might Surprise in Q1 Earnings

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SL Green Realty Corp. (SLG - Free Report) is slated to report first-quarter 2019 results on Apr 17, after the market closes. The company’s quarterly results will likely reflect year-over-year decline in revenues, while its funds from operations (FFO) per share is anticipated to have recorded growth.

In the last reported quarter, this New York office landlord reported FFO of $1.61 per share, missing the Zacks Consensus Estimate of $1.72. This tally was net of $14.9 million, related to early repayment of loan at One Madison Avenue. Nonetheless, the reported figure compares favorably with the year-ago tally of $1.60.

Over the preceding four quarters, the company surpassed the Zacks Consensus Estimate in two occasions, met in the other and missed in another. It delivered average negative surprise of 1.30% during this period. The graph below depicts this surprise history:

SL Green Realty Corporation Price and EPS Surprise
 

Factors to Consider

SL Green’s office and retail platforms have dominant market share in the large and high-barrier to entry New York real estate market, making the company a preeminent leader in the region.

The U.S. office real estate market is benefiting from a decent economy and steady growth in the job market. Particularly, as the economy revives, existing business grows and therefore, corporate sectors seek expansion, renting more space to accommodate the increased workforce. Also, amid healthy growth in demand for office spaces, office landlords can raise rents for properties.

Per a report by the Newmark Knight Frank, the first-quarter office vacancy rate shrunk 30 basis points (bps) year over year to 13%. Further, job creation in office-using sectors boosted new demand, resulting in 3.2% year-over-year growth in asking rents.

Hence, reaping benefits of the favorable real estate trend, the company entered into lease agreements and also announced redevelopment projects. In March, SL Green expanded its 15-year lease with The Carlyle Group at its New York City development — One Vanderbilt. This enabled the company to achieve 54% of leasing ahead of the property's scheduled opening in 2020.

Additionally, in January, it announced a collaboration with The Armani Group for a Madison Avenue redevelopment project.

Furthermore, it is strengthening its office portfolio on the back of redevelopment efforts and non-core asset divestures. We anticipate these strategic moves to have benefited the company in first-quarter 2019. Additionally, we expect asset sales to have provided sufficient cash flows to fund its share buybacks and development projects. This leaves the company’s balance sheet unaffected. 

This March, the company entered into an agreement to sell the 521 Fifth Avenue office property to Savanna — a New York City-based real estate investment manager and developer.It is expected to cash out nearly $100 million in net proceeds through the sale of the 39-story property. However, significant dispositions will likely result in near-term earnings dilution, thereby, impeding the company’s bottom-line growth. 

Although the company’s development activities provide value-creation opportunities, these projects are projected to have created capital expenditure pressure for SL Green. Further, stiff competition and high supply might have impacted rent growth. 

Amid these, for first-quarter 2019, net rental revenues from the company’s properties will likely be around $214 million, reflecting a marginal decline from the prior-year tally. Also, the Zacks Consensus Estimate for first-quarter property operating revenues is currently pinned at $244 million, reflecting an increase from $242 million reported in first-quarter 2017.

Encouragingly, over the past week, the Zacks Consensus Estimate for the first-quarter FFO per share has been revised marginally upward to $1.72, reflecting bullish sentiments of analysts. This also indicates year-over-year growth of 3.6%.

Earnings Whispers

Here is what our quantitative 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 earnings 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 +0.29%.

Zacks Rank: It currently carries a Zacks Rank #3.

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.

Stocks That Warrant a Look

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

Prologis, Inc. (PLD - Free Report) , slated to report first-quarter results on Apr 16, has an Earnings ESP of +0.46% and currently, carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Vornado Realty Trust (VNO - Free Report) , scheduled to release earnings on Apr 29, has an Earnings ESP of +7.53% and a Zacks Rank #3, at present.

Ventas, Inc. (VTR - Free Report) , set to report first-quarter numbers on Apr 26, has an Earnings ESP of +0.7% and a Zacks Rank of 3, currently.

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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