SL Green: Shares Jump on the News of 49.9% Stake Sale in 245 Park Avenue

The shares of no-moat-rated SL Green Realty SLG were up approximately 19% as the company announced it sold a 49.9% interest in 245 Park Avenue to Mori Trust at a gross asset valuation of $2.0 billion. Built in 1967, 245 Park Avenue is one of the headquarters-caliber buildings on the coveted Park Avenue corridor between 46th and 47th Streets, with direct access to Grand Central Terminal. SL Green Realty bought this asset through the bankruptcy process in September 2022 and immediately embarked on repositioning the asset through redevelopments of lobbies, retail storefronts, and other infrastructure upgrades. The Manhattan office real estate market had significantly deteriorated in the past few quarters due to tepid return-to-office recovery, recession concerns, tech sector layoffs, higher interest rates, and lower availability of capital. This deal is a vote of confidence for the valuation of high-quality office assets in Manhattan. The market has been trying to price Manhattan office REIT in an environment where high-value transactions of trophy assets have almost dried up. This deal helps create a valuation benchmark for high-quality office buildings in Manhattan. SL Green reported that the building was 84% occupied and had an annualized contractual cash rent of around $133 million as of first-quarter 2023. Since the company does not provide property level net operating income breakdown, we therefore do not have a precise cap rate for the deal, but it would be safe to say that the cap rate was less than 5%. This is a relief for the Manhattan office REITs, which have sold off considerably in the last few quarters.

SL Green is the most leveraged name within our office REIT coverage. Given that leverage is by far the biggest concern for the company, this deal is a material positive for the company from a balance sheet perspective, as it will reduce the debt burden of the company. We do not plan to change our $45 fair value estimate for the company after incorporating the news.