SL Green: Increasing Uncertainty Rating to Very High Due to the Highly Leveraged Capital Structure

We are increasing our Uncertainty Rating for no-moat-rated SL Green Realty SLG to Very High from High to reflect the significant uncertainty in the office market outlook and the highly leveraged capital structure of the company. SL Green owns high-quality commercial real estate properties, principally office properties in the Manhattan area. The economic uncertainty emanating from the remote work dynamic has created a challenging environment for office owners. Employees are still hesitant in returning to the office as office utilization remains around 50% of the prepandemic level. The vacancy rate for office spaces in Manhattan was recorded at 22.2% in the first quarter of 2022, which is roughly 1,000 basis points higher than prepandemic levels. On the supply side, approximately 10 million square feet of office space, which amounts to around 2.3% of the total inventory, is currently under construction in Manhattan and will be added to the market in upcoming years. We expect this additional supply to further pressure fundamentals in the market. The Manhattan net absorption rate remained negative as of the first quarter of 2023, and rental growth figures are disappointing, especially given the inflationary environment.

The highly leveraged capital structure of the company makes the equity valuation highly sensitive to movements in interest rates and cap rates for the company’s portfolio and is a principal reason behind the Very High Uncertainty Rating for SL Green. For context, the company’s share of debt, which also includes its share of unconsolidated JV debt, was $11.8 billion, and the company had approximately $0.8 billion of excess cash and investments on its balance sheet, resulting in net debt of $11.0 billion as of the end of first-quarter 2023. The company has an annualized EBITDAre of around $0.90 billion, resulting in a net debt/EBITDAre ratio of around 12.2 times. This figure is significantly higher than its peers and is a source of risk for the company.