SL Green: Reducing Our Fair Value After Moderating Long-Term Manhattan Office Recovery Expectations

We are reducing our fair value estimate for no-moat SL Green SLG to $45 per share from $55 per share after moderating our long-term rent growth, occupancy, and Manhattan office sector recovery expectations. Our estimate of SL Green’s weighted average cost of capital is 6.8%, and we apply an enterprise value/EBITDA multiple of 16.6.

We assume the company performs largely in line with the regional dynamics affecting the Manhattan market. In the short term, we expect the occupancy rates to head lower and the rental rates to remain under significant pressure as record-high vacancy rates and the remote work dynamic make it difficult for office owners to increase rental rates that match inflation. In the long term, we expect the Manhattan market to ultimately recover as the supply-demand dynamic stabilizes. We think that there will be enough demand to satisfy the supply side additions in the long run as New York City continues to be the world’s financial epicenter and is increasingly becoming a technology hub.

Although we think the overall market should struggle to contend with new supply in the short term, SL Green’s portfolio should be insulated somewhat considering its portfolio of well-located high-quality properties. We also expect the Manhattan portfolio to perform better over the long run, reflective of a healthier market with more supply constraints. We expect the company’s Manhattan portfolio occupancy to reach 90.3% by 2027 and 90.8% by the end of our forecast period in 2032. We expect a 1.1% compounded annual growth rate in average rent per square feet for the company’s Manhattan portfolio over the next decade as we believe that the rent growth will remain tepid in the near term before it begins to recover slowly in a few years. We project that the company’s finds from operations will remain under significant pressure for a couple of years because of higher interest expenses, but it will start to recover as interest rates decrease from currently elevated levels.