Price-to-funds from operations multiple
The most common way to calculate the relative value of a REIT is the price-to-FFO (funds from operations) multiple. FFO is widely used because it is the main earnings metric for REITs, similar to EPS (earnings per share) in other industries. The price-to-FFO multiple is equivalent to the PE (price-to-earnings) multiple used in other industries.
SL Green Realty’s price-to-FFO multiple
A closer look at SL Green Realty’s (SLG) trailing-12-month price-to-FFO multiple shows that it is in line with its historical valuation. Over the last eight years, Boston Properties’ (BXP) ranged between 1.7x and 21.7x, with a current price-to-FFO multiple of around 17.7x. SL Green Realty experienced its lowest price-to-FFO multiple in March 2009, while its highest multiple was recorded in May 2011.
At the current multiple, SL Green’s stock is trading at a lower price-to-FFO multiple than some of its major peers. Boston Properties (BXP) is trading at a price-to-FFO multiple of 21.8x, followed by Kilroy Realty (KRC) at 19.8x, and Douglas Emmett (DEI) at 18.4x. The industry average price-to-FFO multiple is 14.5x.
Lowest dividend yield
Currently, SL Green Realty offers a dividend yield of 2%, which is lower than its peers’ yields. Columbia Property Trust (CXP) offers a dividend yield of 4.8%, followed by Highwoods Properties (HIW) at 3.9%, and Douglas Emmett (DEI) at 2.7%. SL Green Realty makes up ~1.4% holdings of the iShares US Real Estate ETF (IYR).
Re-rating might happen
SL Green Realty’s lower price-to-FFO multiple was due to a number of factors. As discussed above, SL Green offered one of the lowest dividend yields in the peer group, which is not appealing to investors. In addition, all of the company’s portfolio is concentrated in the New York market. Any downturn in the financial sector could lead to a decline in demand for office properties in the market. The company has a high percentage of variable debt, exposing it to an interest rate hike.
On the other hand, the company’s premium properties are always in demand as they are situated in prime locations. The company’s repositioning of some of its properties in the Manhattan area could unlock a lot of values. This could lead to a higher valuation for the stock. In the next part of this series, we’ll discuss SL Green’s EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple.