SLG - SL Green Realty Corp

[CorpRaider]

REIT.  Manhattan real estate focus.  Seems cheap(ish), especially relative to other REITS. Recently knocked down by analyst downgrades, based on moderating views on Manhattan office and retail (and erething?).  Two posts about the REIT in other threads within in the last day so I thought a thread might be warranted. 

 

@thepupil would you say SLG management ranks higher than VNO from a track record of shareholder alignment/rational behavior?  I seem to recall that they were making some savvy, unorthodox moves during the financial crisis. 

 

They seem to be selling assets and buying back stock which I take as an (initial) signal of shareholder friendliness (i.e., conducting the public-private, arbitrage to increase per share expected returns, versus building your empire, blindly following institutional imperative; raising funds in a market recently described by blackstone as basically insane, in order to get access to more company helicopters).

 

Analyst downgrade yesterday (actually) said this might languish until at least their December 2019(!) investor day.  NY local politics and federal tax policy are viewed as negatives.  Probably takes additional shots in recession.  Most of that is likely transitory in my timeframe.

 

Gotta' do something with EQC distribution (and maybe BRX; Manhattan trophy RE probably > long term ROEs than suburban strip retail).

[CorpRaider]

Quoted post from @thepupil in VNO thread:

 

 

So this happened yesterday...Stifel downgraded SL Green (see reasons below) and the stock went down 4%.

 

On the same day, after the close, SL Green announced the sale of 220 East 42nd Street for $815 million. 220 East 42nd is a 90 year old building in a convenient but stodgy/unhip part of town.

 

Private-Public disconnect at work

 

Public market: We don't want to own this leveraged owner of trophy NYC office at a 6%+ cap, particularly that god awful brand new $3 billion building on top of grand central leased for term to private equity funds...

 

Private market: ya we'll take that 90 year old building leased to Tribune Media and a bunch of unglamorous tenants...how about a 4-4.5 cap.

 

 

SL Green Plunges Most Since 2017 After Stifel Downgrade

By Anisha Sircar

(Bloomberg) -- SL Green Realty fell as much as 4.6%, the REIT’s biggest intraday dip since October 2017, after it was downgraded at Stifel.

Analyst John Guinee downgraded the stock to hold from buy and lowered the PT to $82 from $90

Said multiple concerns will outweigh share repurchase-driven value creation “at least through their December 2019 Investor Day,” including “uninspiring” Manhattan office and retail fundamentals, high leverage metrics, and earnings uncertainty

“A confused prospect never buys, and there is confusion as SLG goes down a very unique and untested path,” Guinee wrote

Noted challenging local politics and SALT tax reform

SLG has 8 buys, 9 holds and 2 sells; avg. PT is $94: Bloomberg data

Shares have fallen 0.2% YTD vs the S&P 500 Real Estate Index +26%

NOTE: The company is scheduled to announce 3Q results Oct. 17

 

[LC]

Back in the day, SL Green actually paid their invoices, which was something special amongst NY RE managers. Vornado was pretty good too IIRC but we did more work with SLG.

[Gregmal]

Back in the day, SL Green actually paid their invoices, which was something special amongst NY RE managers. Vornado was pretty good too IIRC but we did more work with SLG.

 

Are you implying you actually had a job?!

[thepupil]

Corpraider

 

So I don't own SLG and own VNO as my NYC office vehicle. the reason is not because VNO is cheaper (I don't think it is), but rather that I am more confident in my future confidence in averaging down into VNO than SLG. For big positions (VNO is a top 5 position for Pupil and PupilFamily), I want confidence to average down.

 

Since you asked about my opinion of management, I would just caution that I am an armchair stockpicker who has no interactions with any management teams. I wouldn't say SLG or VNO is "better" than the other. Using TSR as a lazy proxy for management, VNO and SLG have returned 9% / annum (9.01% and 9.06%) since 10/2001 (that's as far as Bloomberg goes), -2% and 0.9% since the pre-crisis peak (Jan 2007) and 23% / annum and 13% / annum since MArch 2009 (SLG performed much better because it fell 92% instead of VNO's 73%). On a 2,3,5, 10 year basis it's all pretty much within 100-200 bps of each other.

 

So it's not super clear to me that one is world's better than the other, but they are different. in my view. Both pitch their stocks in a similar manner, which is "here's our enterprise value, we are viewed as an NYC office REIT, but we actually have all this other stuff that's not NYC office, subtract that from our enterprise value and you will get this 'adjusted enterprise value', buying our stock at 'adjusted enterprise value creates a portfolio of manhattan office 200-300-even 400 bps wide of the market and well below replacement cost."

 

You can see SLG's math on page 15 here:

https://slgreen.gcs-web.com/static-files/7ef9deb5-5d78-42bf-8edc-ea6ecf6f2ce1

 

You can see VNO's math on page 6 here

https://investors.vno.com/Cache/1500118478.PDF?O=PDF&T=&Y=&D=&FID=1500118478&iid=103050

 

Very broadly, I'm more comfortable with the structure of VNO's leverage and what comprises their "adjusted enterprise value" in determining the creation price of the core assets.

 

I'm not as comfortable with SLG's combination of $2 billion debt and preferred / mezz portfolio (which is by definition very levered) and corporate level leverage (as in where SLG, not the building is the issuer). This in conjunction with their private-public arbitrage, makes it seem to me that the company's risk profile is increasing and the company is becoming more levered to NYC office fundamentals over time.

 

VNO has been aggressively monetizing assets too, but is doing so in a way that is in my opinion de-risking. For example in the most recent retail monetization, VNO retained $1.8 billion of preferred equity in their newly formed JV. that preferred equity attaches at something lik 50% LTV on 5th avenue and times square signage retail. In my view, that's treasury like or investment grade like credit risk (and it's priced accordingly at 4.2-4.5% coupoun). I would not be surprised to see that converted to cash. over the next 5-10 years, which is dry powder for opportunity.

 

VNO has a big pile of low risk assets (including cash) that more than offset its corporate debt, particurally as 220 CPS units close. And they have 555 california and theMart to provide additional ex NYC cushion to a greater than foreseen decline in the NYC market.

 

In short, I think if the private market is VERY wrong about NYC fundamentals and values, VNO is more cushioned than SLG. I think they have roughly similar upside. SLG is indeed being more aggressive about private/public arbitrage and buying back its shares, but I think it would be wrong to discount VNO's aggressive moves to realize NAV: spin-off of Urban Edge, spin off of JBG, recent retail join venture of scary retail assets, VNO just isn't buying back stock. To me VNO in action, is acting like a bear, loading up the gun for future opportunity.

 

If the private market is right about NYC and the death of office eccconomics is greatly exaggerated, then both will make a lot of money. Both pay you 4% in the meantime to wait.

 

One thing in SLG's favor is that I just plain want to own One Vandy. That thing is the bomb. 15-20 year leases with white shoe law/PE on top of grand central, its the best freaking office building in the world, and I don't think it's really in the price of the stock. To throw out a hyper bullish scenario, let's say SLG achieves their $190mm NOI and you get one sovereign wealth fund to buy it at a 3.75% cap rate, as recognition for its irreplaceability and extremely high quality tenant roster leased up for a long time (it certaibly wouldn't be in my base case, just dreaming). that building would be worth $5 billion, versus $3.3 billion on the balance sheet. they own 70% of it having syndicated to others to de-risk. On a $6.5 billion stock, that type of uplift from one project is very material. I don't think that is a completely absurd scenario. Now there's plenty scenario where One Vandy is worth $3.5 billion and in those I don't think you'll lose money.

 

all just my non-expert opinion, VNO, SLG, and PGRE all trade at a nice discount to private and one can prefer one over the other for valid reasons.

[CorpRaider]

Thanks a lot for the response.  I'm in no big hurry.  I am going to listen to some calls.  I've watched Roth a lot on like youtube videos of appearances and stuff.

 

I wonder which one has more wework exposure.  I guess they both have a lot of exposure, indirectly.  I remember VNO was talking about some "we live" development with them in crystal city, VA and I was like "eye roll."  I also remember them from trying to buy Zell's EOP right before the crash and I think I read stuff about investments they've made in JCP and toys r us.  I wonder if SLG has any of that kind of junk.  I think I'm jaded against Roth. 

 

Maybe I should just stick with Zell and his guys.  haha.

 

 

[Spekulatius]

I agree with above. Even if you aren't bullish about NYC real estate, owning something for 60c on the dollar (give or take) with a good management team should be OK.

 

Wework and imitators hitting the skids and restructuring might become a headwind. I do think the concept is going to survive in some way, maybe with way more equity. I could also envision, startups giving away equity slices instead of cash for part of the rent, or similar things.

[walkie518]

Thanks a lot for the response.  I'm in no big hurry.  I am going to listen to some calls.  I've watched Roth a lot on like youtube videos of appearances and stuff.

 

I wonder which one has more wework exposure.  I guess they both have a lot of exposure, indirectly.  I remember VNO was talking about some "we live" development with them in crystal city, VA and I was like "eye roll."  I also remember them from trying to buy Zell's EOP right before the crash and I think I read stuff about investments they've made in JCP and toys r us.  I wonder if SLG has any of that kind of junk.  I think I'm jaded against Roth. 

 

Maybe I should just stick with Zell and his guys.  haha.

 

SLG has some WeWork exposure but not material (think it's 1% according to the last 10-K). 

 

NAV is probably around $108/sh and at $80, you can buy NYC office at almost an 8 cap (my back-of-napkin not from the presentation) excluding tax friction on the dividend

 

the figures SLG provides, also, is for stabilized assets... if they define what this means, ok, but not a fair number until the contracts get signed

 

I don't put much value in NAV measures either, but an 8 cap is ok... investors certainly want to determine if this is a good risk for the return, especially when $3.40 is distributed and should be discounted by the tax on the distribution (so more like a 3% div than 4% + 3.7% (est owner's earnings)).

 

Ok... so 6.7 cap to own SLG and its development projects, a good deal? 

 

If transactions close at the 4-5 cap range, the stock is undervalued relative to liquidation value.  If transactions close in the 7 cap range, you are at fair value.  This redirects attn to the qualitative elements like stewardship and quality of the development portfolio. 

 

Where numbers look like they're deteriorating: rent revenues... what am I missing?

 

[peterHK]

Basically you buy SLG at like a 8 cap when they're selling ppty at a 4 cap and buying back shares. Pretty easy tbh, but might take a while.

[CorpRaider]

Thanks.  Yeah I guess their risk would be more impact from market rates when a bunch of new buildings come online while wework is bailing on space.

[walkie518]

Thanks.  Yeah I guess their risk would be more impact from market rates when a bunch of new buildings come online while wework is bailing on space.

 

Just a few more items to think about...

 

Between Hudson Yards (10.5m sqft) and WeWork (7.4m sqft), there is a lot of office ... maybe that's the underlying reason the stock is $80/sh?

 

There are 450m sqft of office in Manhattan, 2/3 of which is Class A.  This includes buildings as old as the Empire State Building ($75/sqft) to buildings as new as One Vandy ($135/sqft?!).  (Source Below)

 

10% vacancy sounds about right (SL Green reports ~5%)

 

One step back, this means 45m sqft are vacant then there's new capacity being added at a feverish pace and if WeWork has to relinquish 1/4 of its space, WeWork alone can create a 6% ripple in Class A?

 

https://www.osc.state.ny.us/osdc/rpt10-2017.pdf

 

 

[michaelj]

Thanks.  Yeah I guess their risk would be more impact from market rates when a bunch of new buildings come online while wework is bailing on space.

 

Just a few more items to think about...

 

Between Hudson Yards (10.5m sqft) and WeWork (7.4m sqft), there is a lot of office ... maybe that's the underlying reason the stock is $80/sh?

 

There are 450m sqft of office in Manhattan, 2/3 of which is Class A.  This includes buildings as old as the Empire State Building ($75/sqft) to buildings as new as One Vandy ($135/sqft?!).  (Source Below)

 

10% vacancy sounds about right (SL Green reports ~5%)

 

One step back, this means 45m sqft are vacant then there's new capacity being added at a feverish pace and if WeWork has to relinquish 1/4 of its space, WeWork alone can create a 6% ripple in Class A?

 

https://www.osc.state.ny.us/osdc/rpt10-2017.pdf

 

Keep in mind WeWork has enterprise customers as well as individuals and startups.  In the absence of a downturn, these tenants will continue to need space, and landlords will figure out how to keep them, even if WW is no longer managing

[thepupil]

Thanks.  Yeah I guess their risk would be more impact from market rates when a bunch of new buildings come online while wework is bailing on space.

 

Just a few more items to think about...

 

Between Hudson Yards (10.5m sqft) and WeWork (7.4m sqft), there is a lot of office ... maybe that's the underlying reason the stock is $80/sh?

 

There are 450m sqft of office in Manhattan, 2/3 of which is Class A.  This includes buildings as old as the Empire State Building ($75/sqft) to buildings as new as One Vandy ($135/sqft?!).  (Source Below)

 

10% vacancy sounds about right (SL Green reports ~5%)

 

One step back, this means 45m sqft are vacant then there's new capacity being added at a feverish pace and if WeWork has to relinquish 1/4 of its space, WeWork alone can create a 6% ripple in Class A?

 

https://www.osc.state.ny.us/osdc/rpt10-2017.pdf

 

I agree with your overall point which is "supply/demand and overall fundamentals of NYC office looks shaky". Whether VNO/SLG/PGRE work as stocks (and to what degree) is dependent on "how shaky" "for how shakey is the stock priced versus how shaky will the fundamentals be".

 

A Quibble on WeWork

 

Is WeWork exclusively class A? If not (I don't think it is), I think 6% vastly overstate the potential exposure. There is presumably some underlying demand from WeWork's tenants. It may be lower quality/lower rate/higher turnover/more expesnive to manage than a 10 year long term lease from We, but WeWork equity value drawing down 75%-80% doesn't necessarily mean that those underlying tenants go away. 2% of office occupancy experiencing a 20-50% hit (just assuming WeWork had to somehow strike lower leases to be viable or demand from start-ups takes a big hit) is a lot different than 6% going down by 100%.

 

 

 

 

 

 

 

[walkie518]

Thanks.  Yeah I guess their risk would be more impact from market rates when a bunch of new buildings come online while wework is bailing on space.

 

Just a few more items to think about...

 

Between Hudson Yards (10.5m sqft) and WeWork (7.4m sqft), there is a lot of office ... maybe that's the underlying reason the stock is $80/sh?

 

There are 450m sqft of office in Manhattan, 2/3 of which is Class A.  This includes buildings as old as the Empire State Building ($75/sqft) to buildings as new as One Vandy ($135/sqft?!).  (Source Below)

 

10% vacancy sounds about right (SL Green reports ~5%)

 

One step back, this means 45m sqft are vacant then there's new capacity being added at a feverish pace and if WeWork has to relinquish 1/4 of its space, WeWork alone can create a 6% ripple in Class A?

 

https://www.osc.state.ny.us/osdc/rpt10-2017.pdf

 

I agree with your overall point which is "supply/demand and overall fundamentals of NYC office looks shaky". Whether VNO/SLG/PGRE work as stocks (and to what degree) is dependent on "how shaky" "for how shakey is the stock priced versus how shaky will the fundamentals be".

 

A Quibble on WeWork

 

Is WeWork exclusively class A? If not (I don't think it is), I think 6% vastly overstate the potential exposure. There is presumably some underlying demand from WeWork's tenants. It may be lower quality/lower rate/higher turnover/more expesnive to manage than a 10 year long term lease from We, but WeWork equity value drawing down 75%-80% doesn't necessarily mean that those underlying tenants go away. 2% of office occupancy experiencing a 20-50% hit (just assuming WeWork had to somehow strike lower leases to be viable or demand from start-ups takes a big hit) is a lot different than 6% going down by 100%.

May have skipped explaining a step so wanted to clarify.

 

2/3 of office in Manhattan is Class A meaning ~300m sqft.  Vacancy is ~10% so 30m sqft is current inventory available for lease.

 

WeWork has +/- 7.4m sqft in NYC and if all of a sudden 1/4 comes to market, We would add 1.9msqft to the 30m. 

 

What is considered "Class A" is tough as noted since this puts old buildings w/amenities and brand-new state-of-the-art in the same category.  That said, considering given inventory and what We could take in size, one must assume that at least 2/3s of WeWork is Class A. 

 

Is the building on 40th btw 5th and 6th Class A?  Maybe somewhere between A and B? There are many questions around what Class A might mean.  That said, WeWork is paying top dollar for new projects.

 

Happy to substantiate, but for now ans since this is a different conversation, I ask you trust my claim that paying $100/sqft isn't an agreement that is foreign to the company.

 

[thepupil]

Thanks.  Yeah I guess their risk would be more impact from market rates when a bunch of new buildings come online while wework is bailing on space.

 

Just a few more items to think about...

 

Between Hudson Yards (10.5m sqft) and WeWork (7.4m sqft), there is a lot of office ... maybe that's the underlying reason the stock is $80/sh?

 

There are 450m sqft of office in Manhattan, 2/3 of which is Class A.  This includes buildings as old as the Empire State Building ($75/sqft) to buildings as new as One Vandy ($135/sqft?!).  (Source Below)

 

10% vacancy sounds about right (SL Green reports ~5%)

 

One step back, this means 45m sqft are vacant then there's new capacity being added at a feverish pace and if WeWork has to relinquish 1/4 of its space, WeWork alone can create a 6% ripple in Class A?

 

https://www.osc.state.ny.us/osdc/rpt10-2017.pdf

 

I agree with your overall point which is "supply/demand and overall fundamentals of NYC office looks shaky". Whether VNO/SLG/PGRE work as stocks (and to what degree) is dependent on "how shaky" "for how shakey is the stock priced versus how shaky will the fundamentals be".

 

A Quibble on WeWork

 

Is WeWork exclusively class A? If not (I don't think it is), I think 6% vastly overstate the potential exposure. There is presumably some underlying demand from WeWork's tenants. It may be lower quality/lower rate/higher turnover/more expesnive to manage than a 10 year long term lease from We, but WeWork equity value drawing down 75%-80% doesn't necessarily mean that those underlying tenants go away. 2% of office occupancy experiencing a 20-50% hit (just assuming WeWork had to somehow strike lower leases to be viable or demand from start-ups takes a big hit) is a lot different than 6% going down by 100%.

May have skipped explaining a step so wanted to clarify.

 

2/3 of office in Manhattan is Class A meaning ~300m sqft.  Vacancy is ~10% so 30m sqft is current inventory available for lease.

 

WeWork has +/- 7.4m sqft in NYC and if all of a sudden 1/4 comes to market, We would add 1.9msqft to the 30m. 

 

What is considered "Class A" is tough as noted since this puts old buildings w/amenities and brand-new state-of-the-art in the same category.  That said, considering given inventory and what We could take in size, one must assume that at least 2/3s of WeWork is Class A. 

 

Is the building on 40th btw 5th and 6th Class A?  Maybe somewhere between A and B? There are many questions around what Class A might mean.  That said, WeWork is paying top dollar for new projects.

 

Happy to substantiate, but for now ans since this is a different conversation, I ask you trust my claim that paying $100/sqft isn't an agreement that is foreign to the company.

 

very helpful, thanks! as someone who has tried to quantify and frame the We risk to the whole office market, I wasn't understanding how you were getting to your numbers, but this explains it well.  Sam Zell was somewhere on the record saying that "office would look a lot worse fundamentally if We/co-working wasn't around" and was citing that as one his reasons for general bearishness. Can't find the quote.

 

 

[walkie518]

Thanks.  Yeah I guess their risk would be more impact from market rates when a bunch of new buildings come online while wework is bailing on space.

 

Just a few more items to think about...

 

Between Hudson Yards (10.5m sqft) and WeWork (7.4m sqft), there is a lot of office ... maybe that's the underlying reason the stock is $80/sh?

 

There are 450m sqft of office in Manhattan, 2/3 of which is Class A.  This includes buildings as old as the Empire State Building ($75/sqft) to buildings as new as One Vandy ($135/sqft?!).  (Source Below)

 

10% vacancy sounds about right (SL Green reports ~5%)

 

One step back, this means 45m sqft are vacant then there's new capacity being added at a feverish pace and if WeWork has to relinquish 1/4 of its space, WeWork alone can create a 6% ripple in Class A?

 

https://www.osc.state.ny.us/osdc/rpt10-2017.pdf

 

I agree with your overall point which is "supply/demand and overall fundamentals of NYC office looks shaky". Whether VNO/SLG/PGRE work as stocks (and to what degree) is dependent on "how shaky" "for how shakey is the stock priced versus how shaky will the fundamentals be".

 

A Quibble on WeWork

 

Is WeWork exclusively class A? If not (I don't think it is), I think 6% vastly overstate the potential exposure. There is presumably some underlying demand from WeWork's tenants. It may be lower quality/lower rate/higher turnover/more expesnive to manage than a 10 year long term lease from We, but WeWork equity value drawing down 75%-80% doesn't necessarily mean that those underlying tenants go away. 2% of office occupancy experiencing a 20-50% hit (just assuming WeWork had to somehow strike lower leases to be viable or demand from start-ups takes a big hit) is a lot different than 6% going down by 100%.

May have skipped explaining a step so wanted to clarify.

 

2/3 of office in Manhattan is Class A meaning ~300m sqft.  Vacancy is ~10% so 30m sqft is current inventory available for lease.

 

WeWork has +/- 7.4m sqft in NYC and if all of a sudden 1/4 comes to market, We would add 1.9msqft to the 30m. 

 

What is considered "Class A" is tough as noted since this puts old buildings w/amenities and brand-new state-of-the-art in the same category.  That said, considering given inventory and what We could take in size, one must assume that at least 2/3s of WeWork is Class A. 

 

Is the building on 40th btw 5th and 6th Class A?  Maybe somewhere between A and B? There are many questions around what Class A might mean.  That said, WeWork is paying top dollar for new projects.

 

Happy to substantiate, but for now ans since this is a different conversation, I ask you trust my claim that paying $100/sqft isn't an agreement that is foreign to the company.

 

very helpful, thanks! as someone who has tried to quantify and frame the We risk to the whole office market, I wasn't understanding how you were getting to your numbers, but this explains it well.  Sam Zell was somewhere on the record saying that "office would look a lot worse fundamentally if We/co-working wasn't around" and was citing that as one his reasons for general bearishness. Can't find the quote.

 

to your point (or perhaps to Zell's?), S-1 shows $1.5B of revenues for the six months ending June 30, 2019 with "location operating expenses" at $1.2B, double this number for a full year to $2.4B. 

 

the documentation in the S-1 is a little sloppy, but by end of 2018, We had 331 leases.  This translates to $3.6m/master lease...

 

the S-1 also shows 16.3m usable sq ft (or additions since 2016, which muddies a sense on cost to say the least)

 

assuming this is what We has, they pay $2.4B for lease and amort from buildouts / 16.3m = $147/usuable sqft?!

 

usable vs rentable is probably a factor of 1.3x or so... that is, 30% more rentable space (which is what's advertised) than usable space (which is what you get for yourself so minus common, elevators, mechanical rooms, etc) so $113/rentable sqft on average (class A avg is in the mid-70s now)

 

from the other side, each member today pays ~$5700/year ($3B annual revs / 527,000 members)

 

if We have 16.3m usable and 21.2m rentable they are charging $3B / 21.2m / sqft or $141.58/rentable sqft

 

another slice: 40.2sqft allocation per member or a 6'x6' square

[thepupil]

https://slgreen.gcs-web.com/static-files/6460b6b4-f39c-40a3-8c5b-42c5ffcf73e3

 

a supremely sexy investor day presentation that walks through a lot of what's been discussed here and on the VNO threads. I've stated why I like VNO (and maybe some PGRE) instead of SLG, but this presentation makes the case for they NYC office REITs well in my view, pointing out the robust equity and debt markets, the accretion opportunities via asset sales/stock repurchases, walks through value creation on development, provides math and adjustments and different ways to view leverage with which one can be or not be comfortable with.

 

For anyone interested in VNO/SLG/PGRE or trophy real estate investing in general, it's a cool deck.

[sleepydragon]

https://slgreen.gcs-web.com/static-files/6460b6b4-f39c-40a3-8c5b-42c5ffcf73e3

 

a supremely sexy investor day presentation that walks through a lot of what's been discussed here and on the VNO threads. I've stated why I like VNO (and maybe some PGRE) instead of SLG, but this presentation makes the case for they NYC office REITs well in my view, pointing out the robust equity and debt markets, the accretion opportunities via asset sales/stock repurchases, walks through value creation on development, provides math and adjustments and different ways to view leverage with which one can be or not be comfortable with.

 

For anyone interested in VNO/SLG/PGRE or trophy real estate investing in general, it's a cool deck.

 

Thepupil, have you looked at BPR?

[thepupil]

Not super closely. I flirted with starting BPY as it collapsed in late 2018, but added to others instead. Ultimately, I concluded BPY/BPR trades for similar NAV multiples (maybe even more expensive on an unlevered basis) as other discounted REITs/real estate companies with exposure to unpopular markets such as NYC/London Office (NYC Office comps: PGRE, VNO, SLG, London: BLND, some others but never really looked closely) and retail (MAC/TCO), but has greater overall consolidated leverage and is on the edge of overdistributing.

 

BAM has morphed into a full blown empire and while I think they are saavy, I think their incentives are not completely aligned. Management of a REITs incentives aren't completely aligned either, admittedly. I was early to own and sell BAM (you can see my posts on BAM before it was cool).

 

I sold waaay too early, but given all the changes over the years, I don't really have a strong desire to become a BAM LP.

 

I find the smaller companies with smaller asset bases easier to track and underwrite. VNO is a $30 billion total consolidated asset base and is complex with assets in trophy residential development, San Fran and Chicago office, a high street retail JV, performing office, and office development. But BPY/BPR is an $85 Billion+ total asset base that is even more complex with lots of variability in asset quality. Brookfield's asset base when you include other LP's in their opportunity funds and such is even greater. I also take issue with how brookfield characterizes distributions form their opportunity funds (I can't find the specific presentation) but I recall a presentation where they seemed to be trying to get LP's to think of distributions related to those as sustainable because they'd make profits on the next opp fund and over time it's a self funding beast. I understand this dynamic of a portfolio of seasoned LP commitments to a good performing private fund portfolio, but I really disliked the way they were positioning it to shareholders/unitholders and it just seemed like more rationalization of ever so slightly over distributing. Distributions from an opportunity fund are absolutely in part return of capital and you can't value that like you would core NOI/cash flow. Brookfield knows this and so does any institutional investor, but on the margin I think they try to get unitholders to think about things a little differently in order to hopefully get a more dear currency and become an issuer at a premium and again grow the empire/fee base.

 

Over the years I've followed brookfield, there does seem to be a constant message of trying to get other investors to "capitalize" "one time" fees and or gains from asset sales, which is a very hard sell for me. Ultimately I think BPY/BPR will make a money over the long term for shareholders. My base case would be the brookfield empire does fine and adds value for LP's and collects a lot of fees for doing so. I think it offer similar upside to the types of stuff I own, but I find greater comfort and ability to track the assets with the smaller and simpler companies and I think Brookfield in general sets itself up to be accused of being slightly too aggressive.

 

I don't want to turn this thread into a "is brookfield the next Berkshire or next Valeant" debate, because that debate can be had in the brookfield threads and I don't think I've followed it closely enough to have a super strong or well formed view. If someone want to to pasionately defend or hate on BAM/BPY/BPR they can copy this post and do it on that trhead.

 

  It is simply that some of the aspects of that debate that lead me to own other companies that I think are easier to underwrite. I generally think that risks the public market hates outside of brookfield (retail, development, London/NYC office) kind of get glossed over when they become part of Brookfield because Brookfield has done a great job of attracting very long term and high quality investors as LP's and as shareholders. I try to be likewise long term and a bearer of those types of risks in simpler/less levered and easier to track form in other companies.

[thepupil]

sentiment on SLG and the NYC office REITs appears to be turning somewhat as they continue to put up "better than dogshit levels that are priced in" leasing and asset sale results.

SLG in the low $90's now up from $76, VNO approaching high $60's up from high $50's, still a ways to go in my opinion.

 

 

Stifel:

To  like  SL  Green,  one  has  to:  1)  think  that  the  Manhattan  office  leasing  market  is  turningthe corner, 2) focus on the relatively high 5.7% NOI implied cap rate, 3) appreciate the verylow $708/SF for the Manhattan office TEV, 4) appreciate Manhattan office and multifamilydevelopment,  5)  focus  on  multiple  leverage  metrics,  not  just  debt/EBITDA,  6)  appreciateactive asset recycling, 7) appreciate the 20-35% NAV discount that many assume.•Investor  concerns  continue  including:  1)  Manhattan  office  &  retail  fundamentals  remainuninspiring,  2)  leverage  metrics  are  perceived  as  high  for  all  metrics  except  debt  to  assetvalue, 3) value creation continues to struggle, 4) a confused prospect never buys, and thereis confusion as SLG goes down a very unique and untested path, 5) we expect co-workingheadlines to be negative for a while, 6) local politics are very challenging for office landlords,7) SALT tax reform is a regional head wind, 8) large tenant re-locations will create choppy earnings for years

 

Overall, Manhattan office leasing is uninspiring and a bit confusing with: 1) rents flat to up, 2) concessions mixed, 3) velocity high, 4) capex spend higher, 5) unclear net positive absorption, 6) uncertainty of the real near term use of space absorbed by TAMI and co-workingtenants, 7) lack of a catalyst to help commodity space prosper

 

Our View on One Vandy: We continue to think One Vanderbilt -- perhaps the most significant single building office development in thiscountry in the past half century, in our view -- will surprise cautious investors to the upside and ultimately be worth $2,500-$3,000/SF or$800mm-$1.6B more than the development budget. The major valuation drivers include: 1) office net rental rates achieved, 2) observatory EBITDA, and a 3) stabilized cap rate. We expect the tenants to come from the top twenty buildings in Midtown. We note that One Vanderbiltwill be the best building and best location in Midtown, and Ironworkers are a different breed than REIT types.

 

The Manhattan only Office TEV is $708/SF; a very healthy (62%)/(35%) discount to our estimates for gross/adjusted replacement costof $1,879/$1,095/SF.

 

SL Green Raised as BofA Sees Strong NYC Trends in 2020

By Ryan Vlastelica

(Bloomberg) -- SL Green Realty was upgraded to buy from neutral at BofA, a move that comescn in the wake of the real estate investment trust’s investor day event.

“We have been waiting for more clarity on earnings growth, net effective rents, and the 2020 NYC leasing pipeline,” and the company introduced a strong outlook at the event, analyst James Feldmanwrote to clients

BofA has “an optimistic view of NYC for 2020 with good demand for new and renovated spaces,” and SL Green “will increasingly find ways to benefit from this trend”

PT raised to $103 from $88

10 buys, 8 holds, 2 sells; avg PT $96: Bloomberg data

Shares up 17% from an August low

[CorpRaider]

Any idea what the "very unique and untested path" is?

[johnny]

Maybe it is the disposition of richly valued assets and repurchase of shares with the aim of increasing intrinsic value per share? I had to re-read that part of that deck a few times before I was confident I understood what was going on.

[thepupil]

https://www.google.com/amp/s/www.bloomberg.com/amp/news/articles/2020-04-28/billionaire-reuben-brothers-make-nyc-push-with-bet-on-retail

 

Someone forgot to tell these guys you don’t pay $170 million for a 27,000 sq foot Puma store on 5th Ave anymore.

 

Puma’s lease is 15 years long and was struck in 2018 so that helps.

 

It looks like Puma pays $9.9mm year in rent. No idea on the NOI, but it can’t cost that much to maintain 27K feet; there are taxes though. If it were NNN / 100% NOI Martin this would be a 5.8% cap rate. I’d guess it’s actually low to mid 4 cap, which I think makes sense (for some super rich folks to park money in / store value). Puma has little debt and is a 8 billion euro market cap company. It’s not some AAA megacap but probably not defaulting any time soon; for some rich dudes you just clip your coupon and decrease your cost basis on the building. Own some land on 5th Avenue, quietly point it out to your wife as your stroll down the street on your next trip across the pond “ahh yes, we bought this during coronavirus for but a smidgeon of our liquidity”

 

By the way I think they bought a stake in the building at a $180mm valuation in 2006; there’s been substantial redevelopment and it’s a complex ownership history but I think they just sold the retail store for about the same as the whole office/retail in 2006. The office is leased to WeWork on its entirety.

 

 

[CorpRaider]

Wow.  I guess that location was part of the 65% of retail that paid rent.

[thepupil]

Nicely done. As someone who has hated on SLG’s debt / preferred equity book, I have to give them credit where it is due. They ended the Q with $1.7-8B in that amd just printed $485mm in sales / paydowns at 99.5 grossing down the book by close to 30%. Maybe some new originations offset that a little but it is nevertheless a material de-risking.

 

 

SL Green Provides Update on Key Initiatives

 

Company announces completion of “$1.0 Billion Plan,” further asset sales, May collections and plans to safely welcome tenants back to office buildings

 

Business Wire

 

NEW YORK -- June 1, 2020

 

SL Green Realty Corp. (NYSE: SLG), Manhattan’s largest office landlord, has provided an update on recent activities and progress on key initiatives.

 

“Despite the challenges created by the Covid-19 crisis, I’m very pleased with the performance of the Company throughout the last several months. Our collections have held up well as a result of our high quality, long dated and creditworthy rent roll, and we have amassed a substantial amount of cash liquidity in a short period of time, which is the reflection of the hard work of our employees and the resiliency of the Manhattan real estate marketplace. We have developed a strong re-entry plan to welcome tenants back to their offices in the coming weeks,” said Marc Holliday, Chairman and CEO of SL Green Realty Corp. “This is also a time to give back to the City we love, and we’re proud of our role in launching Food1st, which has now raised $2.0 million and has already served over 100,000 free meals to first responders and New Yorkers in need.”

 

In conjunction with this announcement and REITWEEK, NAREIT’s investor forum on June 2, 2020, the Company will be making a presentation available in the Investors section of the SL Green Realty Corp. website at www.slgreen.com.

 

Key transactions: Since April, SL Green has closed, or placed under contract, dispositions and joint ventures totaling $919.3M of transaction value.

 

Closed on the sale of the unencumbered retail condominium at 609 5th Avenue for total consideration of $168.0 million,

Sold a 49.5% joint venture interest in One Madison Avenue to the National Pension Service of Korea and Hines Interest, LP, which have committed aggregate equity to the project of no less than $492.2 million, and

Generated $485.1 million of cash from the debt and preferred equity (“DPE”) portfolio through the sale of five DPE positions totaling $259.1 million of proceeds at an average price of 99.5% of book value and repayments totaling $226.0 million of proceeds. A portion of the proceeds from these activities was used to repay the Company’s DPE financing facility in its entirety.

“$1.0 Billion Plan” achieved ahead of schedule, allowing share repurchases to resume: In April, SL Green announced the creation of its “$1 Billion Dollar Plan” to amass at least $1.0 billion of cash by June 30, 2020, creating a strategic cash reserve through the sale of real estate assets, the sale of select DPE investments together with repayments, and financing and refinancing activities. As a result of the transactions described above, among other activities, the Company has achieved its goal more than 30 days ahead of its initial timeline. This achievement has allowed the Company to restart its share repurchase program, repurchasing $44.1 million of common stock to date in the second quarter.

 

May Collections: Throughout the COVID-19 pandemic, SL Green has collected the vast majority of its property billings, reflecting the credit-quality of the company’s office and retail tenants. April collections have now reached 95.1% for office, 63.3% for retail and 89.1% overall, up from 91.8%, 60.0% and 85.7%, respectively, as of April 30.

 

To date, May collections are on a similar trajectory to April with collections of 91.1% for office, 54.7% for retail and 84.7% overall. The Company expects May collections to increase further during June as some tenants are taking longer to make payments than they have historically.

 

Construction projects moving forward: SL Green continues to make significant progress on the Company’s development and redevelopment projects, including its most prominent project, the 1.7 million square foot, 1,401 foot tall One Vanderbilt Avenue, which remains ahead of schedule and more than $100 million under budget. The skyline defining tower is 67% leased and is now expected to obtain its Temporary Certificate of Occupancy (“TCO”) on or before September 14, 2020.

 

SL Green plans for safe return to offices: The Company is implementing its “SLG Forward” initiative, a comprehensive approach to providing a safe and welcoming environment to all tenants, visitors and employees. The plan includes a significant financial investment by the Company to provide enhancements to every property’s environment, infrastructure, procedures, technology, cleaning and air filtration in response to COVID-19.

 

SL Green gives back to NYC through Food1st: With the formation of “Food1st”, a non-profit foundation, SL Green has helped deliver over 100,000 meals daily to front-line, first responders and medical personnel, elderly New Yorkers and food insecure families. In addition to addressing the increasing demand for food assistance across New York City, Food1st has also helped support New York City’s food and beverage industry by re-activating restaurant kitchens, to serve the City and bring restaurant staff safely back to work. SL Green contributed $1.0 million as an initial donation to the independent organization while an additional $1.0 million has been contributed by hundreds of other companies, organizations and individuals who have joined the effort to address this crisis. More information is available at www.food1stfoundation.org.

 

About SL Green