Despite competition, debt concerns, SL Green outlook “stable”: Fitch

Ratings agency notes potential effects of a downturn on office REIT's core Midtown market

New York /
Oct.October 20, 2015 01:50 PM

While affirming SL Green Realty’s default rating and providing an outlook of “stable,” credit ratings agency Fitch raised issues with the real estate investment trust’s relationship to debt and noted “concerns” about the Midtown Manhattan office leasing market.

Fitch affirmed SL Green’s rating of BBB- last week, citing credit strengths including a “high-quality New York office portfolio,” a growing pool of unencumbered assets and a “strong, albeit relatively concentrated tenant base.”

But the ratings agency said that optimism was balanced by its take on an “uncertain” Midtown office leasing environment, which it believes is “somewhat dependent on the growth of large financial institutions” and supporting industries like law and accounting firms. It also noted SL Green’s dependence on just a handful of large tenants.

Financial services tenants account for 33 percent of SL Green’s base rental revenue, Fitch said, noting the potential effects of both “a downturn in space demands” from such tenants and “emerging competition” to Midtown landlords from developments like Hudson Yards and Brookfield Place.

In addition, SL Green “continues to incur significant costs in the form of tenant improvements, leasing commissions and free rent incentives as tenant inducements,” the ratings agency said, adding that such conditions had “placed pressure on the company’s fixed charge coverage.”

Despite such headwinds, however, SL Green has “maintained strong leasing volume and has improved occupancy,” Fitch said.

SL Green depends on its top tenants more heavily than its key rivals do, Fitch added. SL Green’s top 10 tenants represent just over a third of its annual base rent. In comparison, rival Manhattan office landlords Vornado Realty Trust and Boston Properties’ top 20 tenants comprise 28 percent and 30 percent of annual base rent. SL Green’s largest tenant is Citigroup, which is responsible for 10.5 percent of the REIT’s annual cash rent.

Fitch also said that SL Green’s ratings were hurt by its ratio of unencumbered asset value to unsecured debt, which is “weaker when compared to similarly-rated companies.” However, it noted that SL Green’s Midtown Manhattan assets “are highly sought after by secured lenders and foreign investors,” which helps insulate the REIT from further risk.

“Midtown Manhattan office assets consistently trade at lower capitalization rates and are more liquid and financeable in economic downturns than typical office assets, bolstering the contingent liquidity of the company’s portfolio,” the ratings agency said.

As far as specific aspects of SL Green’s business, Fitch said the REIT’s leverage “will temporarily increase from historic levels due to the recent acquisition [for $2.6 billion] of 11 Madison Avenue,” which it is largely funding with proceeds from asset sales. That leverage is expected to decline after these buildings are sold.

The ratings agency also said it expects Citibank to exercise a $2 billion purchase option to acquire its headquarters at 388-390 Greenwich Street in Tribeca, and noted that while SL Green’s equity commitment for the One Vanderbilt office tower in Midtown remains “uncertain,” the company has stated that it may consider joint venture alternatives on the project “to reduce its exposure.”


Related Articles

arrow_forward_ios
The Daily News Building at 220 East 42nd Street and SL Green CEO Marc Holliday (Credit: Getty Images)
SL Green puts Daily News building up for sale
SL Green puts Daily News building up for sale
SL Green snags private-equity firm at One Vanderbilt
SL Green snags private-equity firm at One Vanderbilt
SL Green snags private-equity firm at One Vanderbilt
SL Green’s locks in big bank lease at Hudson Yards redevelopment site
SL Green’s locks in big bank lease at
Hudson Yards redevelopment site
SL Green’s locks in big bank lease at
Hudson Yards redevelopment site
R&B Realty's Aron Rosenberg and Maverick's David Aviram of Maverick with 28 West 36th Street and 32 West 39th Street (Google Maps)
Midtown landlord sues to stop foreclosure by Maverick
Midtown landlord sues to stop foreclosure by Maverick
SL Green's Marc Holliday and Brookfield Asset Management's Bruce Flatt with Tower 46. (SL Green, Brookfield)
SL Green to sell its 25% stake in Tower 46 to Brookfield
SL Green to sell its 25% stake in Tower 46 to Brookfield
SL Green CEO Marc Holliday with 11 Madison Avenue and 100 Park Avenue (SL Green, Google Maps/Illustration by Alexis Manrodt for The Real Deal)
SL Green sees improved “market vibe,” office return in “a blink of an eye”
SL Green sees improved “market vibe,” office return in “a blink of an eye”
From left: 11 Madison Avenue, Beam Suntory CEO Albert Baladi and SL Green CEO Marc Holliday (Photos via Beam Suntory; SL Green)
Beam Suntory will move HQ to 11 Madison Ave from Chicago
Beam Suntory will move HQ to 11 Madison Ave from Chicago
From left: Isaac Zion with JMC Holdings' Matthew Cassin (left) and David Taylor (right) (Photos via SL Green; JMC)
Former SL Green exec Isaac Zion joins Acram Group
Former SL Green exec Isaac Zion joins Acram Group
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...