Beaten Down, Shunned By Analysts, SL Green Now Approaches Five-Year Highs

The most popular saying in Wall Street history for building wealth is "Buy low and sell high." But of course, it's not as easy as it sounds, and every stock investor would be worth $136 billion like Warren Buffett. 

The difficulty with buying low and selling high is an investor has to have ice-cold blood in their veins to buy beaten-down stocks when the whole world hates them and then sell them when the world is lining up to buy. But this is the story of one stock that would have produced a gain of approximately 245% over the past four years for such an investor. And it may not be finished with its ascension.

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Four years ago, the world was panic-stricken when a new virus called COVID-19 swept the world and caused hundreds of thousands of deaths. One interesting societal change also occurred: people were forced to work from home instead of going to an office.

However, suddenly, people discovered that working from home had numerous perks, like saving on transportation costs and expensive day care, and not having to waste two hours a day commuting. When COVID-19 finally abated, many employers decided it was cheaper to let the office go and employees were only too happy to work from home.

This was a particularly rough time for real estate investment trusts (REITs) that owned and operated office buildings. SL Green Realty Corp SLG, one of the foremost office REITs, fell from a pre-COVID high of $69.50 to a low of $25.81 in just two months.

SL Green Realty 

SL Green Realty Corp SLG is a New York City-based office REIT and the largest office building landlord in New York. As of June 30, 2024, SL Green Realty held interests in 55 buildings totaling 31.8 million square feet. SL Green pays a monthly dividend of $0.25 per share and yields 4.70%. 

Throughout 2020-2021, as markets stabilized, SL Green rebounded, and by January 2022, it was trading near $69 a share.

But then came inflation and a succession of interest rate hikes by the Federal Reserve. Wall Street investors worried that office REITs could not refinance maturing loan debt, nor acquire new properties with financing that would generate higher Cap rates. REITs such as SL Green lost steam and began a slow decline over the next 14 months.

Numerous analysts were piling on with downgrades and initiating price target cuts. One of the worst calls occurred on March 28, 2023, when Citigroup analyst Nicholas Joseph maintained a Sell rating on SL Green and sliced the price target from $35 to $17. Caitlin Burrows of Goldman Sachs also recently initiated a Sell rating and an $18 price target. The previous week, SL Green reached a low of $16.90.

However, these analysts were simply late to the party. One hour after the Citigroup release, SL Green signed a full-floor lease with Palo Alto Networks at One Madison Avenue. Over the three previous weeks, SL Green increased its leasing pipeline from 700,000 to 1,000,000 square feet. Things were generally turning around for SL Green and New York City real estate.

The stock jumped higher the next day and began a slow climb that would take it to $45 within a year. Many employers realized that the money saved on employees working from home was not worth the reduction in productivity when workers were not together under one roof. SL Green signed 31 office leases of almost 300,000 square feet in Q2 2023. Another price increase occurred near the end of June when SL Green sold its 49.9% stake in 245 Park Avenue at a gross asset valuation of $2 billion.

Despite the gains, in December 2023, SL Green made a tough decision to cut its monthly dividend from $0.2708 to $0.25 per share. This was also the second dividend reduction over the past 13 months. CFO Matt DiLiberto said it was "maintaining a focus on retained cash flow and distributing 100% of our taxable income." Stocks will often sell off after announcing a dividend cut, but Wall Street barely noticed this time. Analysts were slowly warming to SL Green, upgrading it, and raising price targets.

Trending: Finance companies are leaving New York for this hot city. Investing in its booming real estate market has never been more accessible.

Fast forward to 2024, and SL Green was one of the leading REITs in the first half of the year with a 22.76% total return. More leases were signed, and additional debt was successfully refinanced. As the second half of 2024 began, there were even more positives:

Ironically, on June 13, the Citigroup analyst who had maintained a Sell and slashed the price target to $17 some 15 months ago again maintained the Sell rating but raised the price target from $31 to $37. On June 28, Goldman Sachs analyst Caitlin Burrows indicated that although a full recovery would take longer, the worst seemed to be over for commercial real estate assets. This helped to further lift SL Green's price.

On July 9, Scotiabank analyst Nicholas Yulico upgraded SL Green Realty from Sector Underperform to Sector Perform and raised the price target by 23.2%, from $43 to $53. 

On July 17, SL Green announced its office leasing volume had exceeded 1.4 million square feet in 2024 and a sellout of its new Giorgio Armani Residences on Manhattan's posh Upper East Side for $168.20 million. Most importantly, it announced its Q2 results, and for the first time in several quarters, its FFO and revenue had beaten the analysts' estimates.

So, despite all the negative views from analysts and headwinds over the past four years, SL Green closed at $62.19 and is now only about 12% below its five-year high. The payout ratio on the $3.00 annual dividend is less than 40%, so there is little reason to expect another dividend cut. However, one risk remains: the market's anticipation of at least one FED interest rate cut in 2024 has already boosted SL Green's share price. So, if the FED decides to hold off on cutting the rate in September, that would likely cause a substantial pullback in share price.

It would also be advantageous for SL Green to increase the dividend because the yield of 4.78% is now below many money market rates. One of the main reasons for SL Green's popularity among income investors has always been its high dividend yield. Still, investors willing to forego possible appreciation can get a better yield with less risk. 

Four years later, COVID is still around in milder forms, but New York City's commercial landlord king has survived and is now thriving. It's very possible that without another major mishap, SL Green could once again challenge its five-year highs.

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