SL Green Earnings: Deleveraging by Disposing of Office Assets Augurs Well for Investors

No-moat-rated SL Green Realty SLG reported funds from operations of $1.43 per share for the second quarter, 7.3% lower than the $1.87 per share in FFO in the year-ago period. The decline in FFO can largely be attributed to higher interest payments on the company’s debt and the challenging environment for office real estate in Manhattan. After incorporating second-quarter results, we are maintaining our $45 fair value estimate.

Same-store net operating income, including the company’s share from unconsolidated joint ventures, decreased 2.7% on a GAAP basis compared with the year-ago quarter. The company’s overall same-store cash NOI increased 3.6% after excluding lease termination income compared with the previous year. The company signed 410,749 square feet of Manhattan office leases in the second quarter with the mark to market on those leases 2.2% lower than the previous fully escalated rents. Manhattan same-store office occupancy continued to decline, reflecting the considerable stress in the office market. Manhattan same-store office occupancy was reported at 89.8% for the current quarter, down 40 basis points on a sequential basis and 280 basis points from the second quarter of the previous year.

The highlight of the quarter was the company selling a 49.9% interest in 245 Park Avenue to Mori Trust at a gross asset valuation of $2.0 billion. SL Green reported that the building was 80.1% occupied and had an annualized contractual cash rent of around $135 million as of the second quarter. The transaction has helped SL Green reduce the consolidated debt on its balance sheet from $5.6 billion in the first quarter to $3.8 billion in the second quarter as the remaining ownership interest of the company in the building is accounted for as an unconsolidated joint venture. We think that the deleveraging enabled by the transaction is a net positive for the shareholders, given the company’s high leverage.