High-Rise REIT Gets a Better View: Opinion

The top 10 tenants account for 32% of SL Green's rent and are primarily strong investment grade, which shows the tenant diversity of this REIT as well as the ability of these tenants to pay their rent.

Ultimately, portfolio occupancy and tenant diversity have to lead to income and growth of income. SL Green, while positioned in one of the most competitive markets in the U.S., has been able to grow net operating income at approximately 4%.

While income growth is important, it must translate into a solid financial profile from which the REIT can comfortably and consistently make dividend payments to investors. SL Green has been able to grow funds from operations and make comfortable dividend payouts from these funds. In the last quarter, the dividend payout ratio was 13%, giving the company significant financial flexibility to both grow and continue to pay dividends.

As with any investment, there should be growth drivers present to ensure increasing profitability and a growing income stream available to investors. The primary driver for SL Green is the recovering employment fundamentals in New York City and its impact on market rents. As the following graph shows, New York is second only to Houston in employment recovery, having recovered more than 125% of jobs lost at the trough of the decline.

And when we compare employment to rents, the growth driver emerges. The following graph will help visualize the activity.

Performance for the equity has been decent, but has not kept up with the REIT space due to its office focus, which has underperformed most REIT sectors.