SL Green Earnings: Occupancy Declines but Management Expects To Improve Occupancy by Year-End

No-moat-rated SL Green Realty SLG reported middling first-quarter results as the Manhattan office market remains under stress. The firm reported funds from operations, or FFO, of $1.53 per share, 7.3% lower than the $1.65 per share in FFO during the first quarter of 2022. The decline in FFO can largely be attributed to higher interest payments on the company’s debt as interest rates have been rising. We are maintaining our $55 per share fair value estimate after incorporating the first-quarter results.

The same-store net operating income, or NOI, including the company’s share from unconsolidated JVs, decreased by 0.3% on a year-over-year basis in the first quarter. The company’s overall same-store cash NOI increased by 5.3% after excluding lease termination income compared with the previous year. The company signed 504,682 square feet of Manhattan office leases in the first quarter with the mark-to-market on those leases being 5.3% higher than the previous fully escalated rents. Manhattan same-store office occupancy continued to decline, reflecting the considerable stress in the office market. The Manhattan same-store office occupancy was reported at 90.2% for the current quarter, down 180 basis points on a sequential basis and 280 basis points when compared with the first quarter of the previous year. On a positive note, management has reaffirmed its expectation to increase Manhattan same-store office occupancy to 92.4% by year-end.

The company distributed $0.81 per share in dividends during the first quarter, which results in an annualized dividend of $3.25 per share. This equates to a dividend yield of around 12.5% ($3.25/$26) as per the latest share price. The company’s FAD payout ratio, which is an indicator of dividend safety, was around 79% on a trailing 12-month basis. We note that the dividend yield of the company can look appealing, but there is a reasonable probability of dividend cuts in the future given the highly leveraged structure of the company.