How To Look At SL Green Realty Corp. (NYSE:SLG)

SL Green Realty Corp. is a US$6.7b mid-cap, real estate investment trust (REIT) based in New York, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. Below, I’ll look at a few important metrics to keep in mind as part of your research on SLG.

See our latest analysis for SL Green Realty

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much SLG actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For SLG, its FFO of US$442m makes up 56% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:SLG Historical Debt, August 23rd 2019
NYSE:SLG Historical Debt, August 23rd 2019

Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for SLG to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 7.9%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SLG 13 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at SLG’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 1.98x, SLG is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

In terms of valuing SLG, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. SLG’s price-to-FFO is 15.36x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

As a REIT, SL Green Realty offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in SLG, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for SLG’s future growth? Take a look at our free research report of analyst consensus for SLG’s outlook.
  2. Valuation: What is SLG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SLG is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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