2022 has begun with the covid shadow still hanging over us. Some segments of the stock market have benefitted form the pandemic’s impact and others have learned to live alongside it. Most, though, will be glad to see the back of it for good, not least the segment housing the Office REIT.
Deutsche Bank’s Derek Johnston thinks these names “remain the penalty box” with the WFH trend still posing questions over the segment’s prospects.
“It now seems to be a sell-side consensus that the office faces secular demand risks with most analysts and investors sounding the alarm or avoiding the property type,” noted the analyst. “We are rarely fans of consensus calls and with Office REIT valuations lagging all other property types in 2021, we see reasons to be selectively more constructive.”
With sentiment depressed, Johnston believes the year will be a “show me” story for the sector and while expectations are low, the analyst thinks “public REIT leasing velocity will surprise to the upside in 2022, especially among the highest quality portfolios.”
And this is where Johnston turns positive on SL Green Realty (SLG), the company which dubs itself Manhattan’s “largest office landlord.” As of the end of 3Q21, this high-yield dividend REIT (8.48%) held a stake in 76 buildings with a total of 35.3 million square feet, with 27.2 million of those square feet coming from Manhattan buildings.
With its high-quality assets, Johnston views SLG as the “best in class NYC CBD (central business district) office.” With another large-scale development project at One Madison, the company is poised to build off its success at One Vanderbilt, which will place it in a good spot to “drive further portfolio improvement over the mid to long term.”
Further bolstering the bull case, with the city reopening, since Labor Day, NYC office utilization rates have been on the up. Johnston also believes additional support should come in the form of the recently authorized Paxlovid anti-viral therapeutic. And although Johnston admits that due to pandemic related impacts, “some uncertainty remains,” he believes SLG is “well positioned to build occupancy in 2022 and expects to see flat lease spreads, two key inflection points on its return to growth.”
Accordingly, Johnston upgraded SLG’s rating from Hold to Buy, while increasing the price target from $77 to $82. The new figure implies ~11% upside from current levels. (To watch Johnston’s track record, click here)
The Street’s average target is only slightly lower, coming in at $80 and suggesting one-year gains of 11%. Overall, the stock manages to eke out a Moderate Buy consensus rating, based on 2 Buys vs. 5 Holds. (See SLG stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
