The big question for office real estate investment trusts (REITs) has been whether the work-from-home trend has created a permanent reduction of demand for office space. Numerous CEOs, including JP Morgan Chase head Jamie Dimon, have been blunt in encouraging employees back to the office. Now we are seeing fears of the delta variant of COVID-19 pushing return-to-the-office plans back again.
Manhattan office space REIT SL Green (SLG -4.21%) recently published second-quarter earnings and spent a lot of time discussing the current thinking of its tenants.
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SL Green's tenants see a full return to work beginning after Labor Day
The company has not seen any indication that companies are planning on shrinking square footage in response to work-from-home trends. On the earnings conference call, SL Green CEO Marc Holliday had this to say:
The majority of our tenants are planning for their workers to return after Labor Day and more importantly, we do not see any material trends in hot desking or shrinking footprints. To the contrary, we see a trend of businesses availing themselves at this moment in time in the market to lock in space and make investments in improved work environments, technology and amenities as a way of competing for talent and making a compelling case to their employees for work from office.
The delta variant could push things back
The wildcard in this question is the delta variant of COVID-19 and whether that will cause companies to push back the return to the office, as Apple has apparently done . At the moment, any sort of delta-driven delay will be measured in weeks, not months. SL Green's tenants generally lock up space for a period of five to 10 years, so incremental delays are probably not going to impact longer-term plans all that much.
For the second quarter ending June 30, SL Green reported funds from operations (FFO) per share of $1.60 compared to $1.70 a year ago. The second quarter of 2020 had extra lease termination income, which explains the decrease in FFO per share. Same-store cash net operating income fell 9.2%. Manhattan occupancy was 93.6% at the end of the quarter.
The company is signing new tenants, and it appears concessions have stabilized
Despite any fears of the delta variant, lease signings have continued, with the company signing up 557,703 square feet of space during the quarter. The company mentioned on the call that concessions have stabilized, and the typical concession might be 12-14 months' of free rent including $110,000-$130,000 in tenant improvements. The financial sector has been the greatest source of leasing demand, but information technology and professional business services have been strong as well.
SL Green is guiding for 2021 FFO per share to come in between $6.30 and $6.70 per share, which is a decrease compared to the $6.82 in FFO per share it earned last year. This puts the company on a multiple of 11.6 times FFO per share, which is in the lower end of its historical trading range. SL Green pays a monthly dividend of $0.303 per share, which works out to be a yield of 4.91%. Given the guidance for $6.30-$6.70 FFO per share, the dividend is amply covered.
SL Green has rallied 70% from its COVID-19 lows, which means the stock can no longer be considered beaten up, and it looks like the worst is over as concessions have stabilized. The company still has a ways to go in order to recoup all of its COVID-19 related losses, but fears of a sea change in corporate attitudes toward Manhattan office real estate have yet to be be realized.
