The Real Deal New York

SL Green downgraded by another investment bank

Stifel notes "stagnated" value creation from NYC office REIT

August 20, 2015 04:55PM
By Rey Mashayekhi

Marc Holliday and 11 Madison Avenue in the Flatiron District

Marc Holliday and 11 Madison Avenue in the Flatiron District

Fresh off a bearish outlook delivered by Goldman Sachs last month, SL Green Realty received another downgrade from a financial services firm this week — with St. Louis-based Stifel Nicolaus downgrading the real estate investment trust to a “hold” rating from its previous “buy” status.

The ratings drop comes as the ink has yet to fully dry on SL Green’s colossal $2.6 billion acquisition of 11 Madison Avenue from the Sapir Organization and CIM Group.

While noting that the city’s largest office landlord is “extremely well protected” by a Manhattan office portfolio featuring a total enterprise value (TEV) of $815 per square foot, Stifel cited concerns this week that SL Green’s value creation “appears to have stagnated” over the first half of this year.

The firm described SL Green as “primarily an NAV [net asset value] stock,” with that measure “very difficult to determine” due to “many moving pieces.” But Stifel expressed hope that $1 billion in planned asset sales spurred by the 11 Madison Avenue deal, as well as positive leasing spreads, could “reverse” stagnated value creation.

In an earnings call last month, SL Green CEO Marc Holliday said he would look for ways to monetize the property in the future.

“We tend not to hold on to assets in perpetuity,” he said on the call. “I would look at this asset as on a three-to-five-year period and then we’ll always readjust from there.”

Stifel had previously upgraded SL Green to a “buy” rating in October 2009 – which, until the downgrading this week, represented the firm’s “longest continual buy-rated office REIT.” Last month, Goldman Sachs downgraded the REIT, as well as Vornado Realty Trust, citing a “maturing” commercial real estate cycle bracing for an interest rate hike.

The new “hold” rating means expected total returns for SL Green shareholders of between -5 percent and 10 percent over the next 12 months, compared to a “buy” rating constituting expected total returns greater than 10 percent over that same period, according to Stifel.

SL Green isn’t alone in receiving an increasing bearish outlook from the investment community, with several New York City-focused REITs experiencing sharp drops in returns and price performance since the start of the second quarter.