SL Green (SLG) Likely To Beat Q2 Earnings: Stock To Gain?

SL Green Realty Corp. (NYSE:SLG) is slated to report second-quarter 2016 results after the market closes on Jul 20. Last quarter, this real estate investment trust (“REIT”) had delivered a positive surprise of 12.1%.

In fact, SL Green beat estimates in all of the four trailing quarters, with a positive average earnings surprise of 7%. The Zacks Consensus Estimate for second-quarter funds from operations (“FFO”) per share is currently $3.18.

Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that SL Green is likely to beat estimates because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to beat estimates, and SL Green has the right mix.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate Estimate of $3.37 and the Zacks Consensus Estimate of $3.18, is +5.98%. This is a meaningful and leading indicator of a likely positive surprise.

Zacks Rank: SL Green carries a Zacks Rank #3. The combination of SL Green’s Zacks Rank #3 and positive ESP makes us reasonably confident of a positive surprise this season.

Conversely, we caution against stocks with Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

What's Driving the Better-than-Expected Earnings?

SL Green is pursuing an opportunistic investment policy to enhance its overall portfolio. This includes investment in long-term core properties, opportunistic assets and debt & preferred equities. Also, in order to facilitate such investments, SL Green continues to divest non-core assets. In sync with this strategy, the company completed several transactions in the second quarter.

Notably, in June, SL Green announced the inking of a 10-year renewal and expansion lease deal with New York Life Insurance Company at the Graybar Building. Also, in May, the company disclosed the acquisition of a 20% stake in Manhattan’s luxury residential tower “Sky”. Earlier, in Apr 2016, SL Green inked a deal to sell 500 West Putnam Avenue. In the same month, the company also inked a deal with an affiliate of Citigroup (NYSE:C), for the accelerated sale of 388–390 Greenwich Street for $2 billion.

However, a large chunk of SL Green’s revenues is derived from its office portfolio, demand for which is highly correlated with job growth. Apart from this, intense competition from owners, developers and operators of other office properties and commercial real estate limits its ability to retain tenants. Moreover, any further rise in interest rate would negatively impact the REIT’s financials and hurt its dividend payout capability.

SL GREEN REALTY Price and EPS Surprise

SL GREEN REALTY Price and EPS Surprise | SL GREEN REALTY Quote

Stocks to Consider

Here are three other REITs that you may want to consider as our model shows that they also have the right combination of elements to post an earnings beat this quarter:

American Campus Communities, Inc. (NYSE:ACC) , slated to release earnings results on Jul 25, has an Earnings ESP of +1.89% and a Zacks Rank #2.

CoreSite Realty Corporation (NYSE:COR) , slated to release earnings results on Jul 28, has an Earnings ESP of +1.18% and a Zacks Rank #2.

Gramercy Property Trust Inc. (NYSE:GPT) , slated to release earnings results on Aug 4, has an Earnings ESP of +11.77% and a Zacks Rank #3.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.