SL Green Earnings: Challenging Manhattan Office Market Continues to Bite

No-moat-rated SL Green Realty SLG continues to navigate the extremely challenging Manhattan office market. The company reported middling performance in the third quarter, as funds from operations came in at $1.27 per share, 23.5% lower than the $1.66 in the third quarter of 2022. The considerable decline in FFO can largely be attributed to higher interest payments on the company’s debt. SL Green has lowered its 2023 FFO guidance to $5.05-$5.35 per share from $5.30-$5.60, due to $0.10 per share of severance expense and $0.17 per share of accelerated stock-based compensation expense related to the nonrenewal of President Andrew Mathias’ employment agreement. The severance-related expenses are nonrecurring in nature and are expected to result in general and administrative savings of $10 million-$11 million on a run-rate basis. We are maintaining our $45 fair value estimate after incorporating third-quarter results.

Same-store cash net operating income, including the company’s share from unconsolidated joint ventures, increased 10.4% year over year after excluding lease termination income. The company signed 355,831 square feet of Manhattan office leases in the third quarter, with the mark to market on those leases 3.8% lower than the previous fully escalated rents. We expect re-leasing spreads to remain in negative territory, given the stressful conditions in the Manhattan office market. Manhattan same-store office occupancy did improve sequentially, to 89.9% in the third quarter from 89.8% in the previous quarter.