The Real Deal New York

Goldman upgrades SL Green but maintains “cautious outlook”

Shares of city's largest office landlord have dropped 31 percent since Dec. 1

February 19, 2016 06:10PM
By Rey Mashayekhi

Marc Holliday SL Green

Marc Holliday

Seven months after downgrading SL Green Realty to a “sell” rating on fears of a “maturing” commercial real estate cycle, investment banking giant Goldman Sachs upgraded the real estate investment trust back up to “neutral” on Friday.

Goldman said the “significant underperformance” of SL Green stock, which has fallen 31 percent since Dec. 1, insulates investors from risk moving forward – though it maintains “a cautious outlook on SLG’s long-term growth” and believes “possible negative catalysts” remain for the city’s largest office landlord.

The investment bank also cut its 12-month price target on the REIT’s stock to $95 per share, from $100 previously. SL Green stock opened at $84.76 per share on Friday, down from a 52-week high of $135.81.

Despite SL Green indicating that it will sell assets with a view to debt reduction, Goldman said it expects to see non-trophy asset sales become more challenging in a “softening market” and forecast “decelerating [New York City] office demand based on share prices of major NYC tenants.”

In the company’s year-end earnings call last month, SL Green CEO Marc Holliday forecast economic “headwinds” that could slow down job creation in New York City and potentially dampen the city’s office leasing market.

The bank also cast doubts on “a consistent upward trend” in SL Green’s average price per square foot within its debt and preferred equity portfolio — noting that “any ‘hiccup’/default in the performance of this portfolio could be a substantial negative.”

In addition, Goldman said investors would likely “react negatively” if SL Green were to proceed with the development of its One Vanderbilt office tower without identifying its intended joint venture partner on the project – pointing to the “magnitude” of the planned 1.6 million square-foot building.

SL Green’s stock performance over the past six months compared to rival commercial office REIT Boston Properties “is at its worst level since 2009,” the investment bank added.

But Goldman noted that SL Green’s recent struggles in the market “capture much of our negative view,” and that the upgrade to a “neutral” rating comes as the company’s struggles have offset “near-term downside” – with the REIT’s valuation “now more likely to offer support.”

In addition to Goldman’s “sell” rating of the company, last summer also saw SL Green downgraded by St. Louis-based financial services firm Stifel Nicolaus, which cited “stagnated” value creation by the company through the first half of last year.

In October, credit ratings agency Fitch affirmed SL Green’s default rating of BBB- and provided a “stable” outlook for the REIT, noting its “high-quality New York office portfolio.”