SL Green Realty Corp.: The Ultimate Capitulation Move (NYSE:SLG)

SL Green Realty Corp. (NYSE:SLG) investors have suffered from multitudinous headwinds that buffeted SLG over the past year. Accordingly, it fell rapidly after staging its June highs, taking out its COVID lows, as investors bailed out.

As such, it has also sent the leading Manhattan office landlord into panic valuation zones. Accordingly, SLG last traded at an NTM dividend yield of 8.6%, well above the two standard deviation zone over its 10Y average of 3.8%.

But why the panic? SLG investors were treated to a 12.9% dividend cut in early December as management laid out its plans at the REIT’s Investor Day.

It also revised its 2023 FFO per share guidance markedly downward to a range of between $5.30 to $5.60, which were well below the previous consensus estimates.

The company remains confident in achieving same-store office occupancy rate of 92.4% (Vs. Q3’s 92.1%). However, management also alluded to structural and macroeconomic headwinds that investors must pay close attention to at its upcoming Q4 and FY22 earnings release on January 25.

We assessed that the market’s pessimism suggests further dividend cuts should not be ruled out, as macro risks have intensified since early December. However, with SLG priced at a steep discount relative to its average yields, we are confident that it’s likely too late to flee now if you are still holding the bag. Instead, if you still have high conviction over its business model, it could be an opportune time to add more positions, capitalizing on the market’s extreme fear.

Despite that, we encourage investors to assess whether it makes sense to hold SLG long-term or leverage the current levels as an opportunistic entry. Why?

Management highlighted at its Investor Day that the work-from-home/hybrid arrangements have continued to affect its occupancy, which has persisted longer than the company had anticipated. CEO Marc Holliday enunciated:

While office-using jobs are now 104% of pre-pandemic levels, there is no denying that day-to-day office occupancy remains stubbornly low, with most days hovering around 60% of pre-pandemic physical occupancy. The hybrid work model has persisted far longer than I expected it to as some business leaders continue to justify remote work as either a cost saving measure or an effective recruiting tool. Their actions to promote hybrid work models are putting extreme pressure on other employers to similarly offer work-from-home options in a self-defeating cycle even in the face of growing evidence that it lowers productivity and savages the work culture. – SLG Investor Day

Accordingly, studies have assessed that hybrid/work-from-home arrangements are likely to carry on, worsened by tight labor demand/supply dynamics.

Furthermore, employers and employees have coalesced around leveraging the benefits of remote/hybrid working while capitalizing on the serendipitous moments when they return to the office. Therefore, such arrangements are reported to have stabilized well above pre-pandemic days.

As such, we believe that SL Green Realty likely faces structural headwinds which could affect long-term buying sentiments.

Notwithstanding, we believe the opportunity for investors who do not intend to hold it for the long term still looks attractive.

While the company has continued to hedge its interest rate risks, given the increasingly hawkish Fed, we believe we are nearing the peak of the Fed’s rate hikes. As such, it should help mitigate the cap rates bifurcation between buyers and sellers that also impacted its disposition cadence, affecting its liquidity.

However, debt financing is likely to remain costly as the Fed could keep its elevated rates for much longer than anticipated, dealing investors another blow on their expectations for a quick recovery.

Despite that, SLG’s collapse from its June highs is emblematic of a capitulation move by market operators.

Taking out its COVID lows is also constructive, shaking out the COVID bottom-fishers who feared a worse selloff.

We gleaned a constructive consolidation phase since December. However, SLG buyers need to defend the current levels stoutly for its momentum to recover. Still, the extent and steepness of the selloff have created a fantastic opportunity even for speculative investors.

Rating: Speculative Buy.

Note: As with our cautious/speculative ratings, investors must consider appropriate risk management strategies, including pre-defined stop-loss/profit-taking targets, within an appropriate risk exposure.