Jones Lang LaSalle
REIT's premium pricing goes through ceiling
SL Green's stock runs ahead of office demand; extra risks
By Tom Fredrickson
Published on March 13, 2006
Economists said last week that New York City added 25,000 jobs in January alone--great news for major office building owners like SL Green Realty Corp.
But given that the firm's stock has soared 60% in the past year, closing Friday at $93.55, the good news about real estate demand is already baked in.
SL Green, a real estate investment trust, trades at 22 times its trailing 12 months' funds from operations, or FFO--a common measure of performance for REITs. That compares with 18 times for Vornado and Reckson, and 13 for Mack-Cali. True, SL Green is a solid company that deserves a premium, but not such a large one. Investors should steer clear.
Even though the scarcity of Manhattan office space is putting upward pressure on rents, SL Green is unable to go on a rent-raising binge because only about 8% of its office space leases come up for renewal this year and next.
The firm's premium looks even more questionable when one considers risk. Much of SL Green's profit comes not from its dependable income-producing office towers, but from commercial lending and structured investments.
Mixed bag
"When investors invest in the company, they are not getting a pure property REIT," says Arthur Oduma, an analyst with Morningstar Inc.
Mr. Oduma calculates that lending and structured investments contributed 48% of FFO in 2005, up from 36% in 2004. SL Green Chief Financial Officer Gregory Hughes disputes the analysis, saying "north of 85% comes from office buildings." Either way, the proportion of financial income is above average for an office REIT.
As interest rates rise, the company may have trouble balancing its cost of funding with its loan yields. About 20% of its debt floats, meaning that funding costs will rise as interest rates move up.
The rapid run-up in the company's stock has reduced its dividend yield to 2.6%, making the shares less attractive to investors looking for income. The REIT, which was formed in 1997 by combining SL Green Properties and affiliated companies, has seen its share price skyrocket nearly 500% since 2000.
SL Green generated $4.16 per diluted share in funds from operations in 2005, an increase of 10.3% over year-earlier levels. Revenues increased 12%, to $298 million, and they look likely to keep growing. The REIT's 29 office buildings were 97% filled at the end of 2005. The seasoned management team is skilled at scooping up Class B and, increasingly, Class A space at good prices.
PAST & FUTURE
Pieces of the rock are getting pricey. The news last week that Prudential Financial will acquire Allstate's annuities business for $560 million sent the Newark-based insurer's shares to $76.04, up more than a third in the last year. And with good reason: Pru has posted a long string of double-digit quarterly earnings gains.
Fund management is a tough business these days. Add a whiff of scandal, however, and it gets even tougher. Last week, Gamco Investors found that out after the Justice Department alleged that founder Mario Gabelli had schemed to swindle the government during wireless spectrum auctions. The shares tanked, losing nearly 9% on Wednesday before bouncing back a bit to end the week at $42.72.
The fourth-quarter earnings coming from New York & Co. this week are expected to show a loose thread in the clothier's finances, and analysts anticipate a worse unraveling to come. NY & Co. is expected to report a slight earnings dip, despite a rise in quarterly sales. The stock soared 13% last week, but is still down 26% from the first of the year.
Comments? TFredrickson@crain.com
©2006 Crain Communications Inc.
REIT's premium pricing goes through ceiling
SL Green's stock runs ahead of office demand; extra risks
By Tom Fredrickson
Published on March 13, 2006
Economists said last week that New York City added 25,000 jobs in January alone--great news for major office building owners like SL Green Realty Corp.
But given that the firm's stock has soared 60% in the past year, closing Friday at $93.55, the good news about real estate demand is already baked in.
SL Green, a real estate investment trust, trades at 22 times its trailing 12 months' funds from operations, or FFO--a common measure of performance for REITs. That compares with 18 times for Vornado and Reckson, and 13 for Mack-Cali. True, SL Green is a solid company that deserves a premium, but not such a large one. Investors should steer clear.
Even though the scarcity of Manhattan office space is putting upward pressure on rents, SL Green is unable to go on a rent-raising binge because only about 8% of its office space leases come up for renewal this year and next.
The firm's premium looks even more questionable when one considers risk. Much of SL Green's profit comes not from its dependable income-producing office towers, but from commercial lending and structured investments.
Mixed bag
"When investors invest in the company, they are not getting a pure property REIT," says Arthur Oduma, an analyst with Morningstar Inc.
Mr. Oduma calculates that lending and structured investments contributed 48% of FFO in 2005, up from 36% in 2004. SL Green Chief Financial Officer Gregory Hughes disputes the analysis, saying "north of 85% comes from office buildings." Either way, the proportion of financial income is above average for an office REIT.
As interest rates rise, the company may have trouble balancing its cost of funding with its loan yields. About 20% of its debt floats, meaning that funding costs will rise as interest rates move up.
The rapid run-up in the company's stock has reduced its dividend yield to 2.6%, making the shares less attractive to investors looking for income. The REIT, which was formed in 1997 by combining SL Green Properties and affiliated companies, has seen its share price skyrocket nearly 500% since 2000.
SL Green generated $4.16 per diluted share in funds from operations in 2005, an increase of 10.3% over year-earlier levels. Revenues increased 12%, to $298 million, and they look likely to keep growing. The REIT's 29 office buildings were 97% filled at the end of 2005. The seasoned management team is skilled at scooping up Class B and, increasingly, Class A space at good prices.
PAST & FUTURE
Pieces of the rock are getting pricey. The news last week that Prudential Financial will acquire Allstate's annuities business for $560 million sent the Newark-based insurer's shares to $76.04, up more than a third in the last year. And with good reason: Pru has posted a long string of double-digit quarterly earnings gains.
Fund management is a tough business these days. Add a whiff of scandal, however, and it gets even tougher. Last week, Gamco Investors found that out after the Justice Department alleged that founder Mario Gabelli had schemed to swindle the government during wireless spectrum auctions. The shares tanked, losing nearly 9% on Wednesday before bouncing back a bit to end the week at $42.72.
The fourth-quarter earnings coming from New York & Co. this week are expected to show a loose thread in the clothier's finances, and analysts anticipate a worse unraveling to come. NY & Co. is expected to report a slight earnings dip, despite a rise in quarterly sales. The stock soared 13% last week, but is still down 26% from the first of the year.
Comments? TFredrickson@crain.com
©2006 Crain Communications Inc.
posted by Jones Lang LaSalle NJ News Blog at 2:55 PM
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