SL Green Operating Partnership, L.P. -- Moody's downgrades SL Green's senior unsecured debt rating to Ba1, outlook is stable

Rating Action: Moody's downgrades SL Green's senior unsecured debt rating to Ba1, outlook is stableGlobal Credit Research - 30 Mar 2022New York, March 30, 2022 -- Moody's Investors Service ("Moody's") has downgraded SL Green Operating Partnership, L.P.'s senior unsecured debt rating to Ba1 from Baa3 due to the expectation that leverage metrics will remain high despite income growth, and the capital strategy of using asset sales proceeds to buyback stock will continue. In the same rating action, the parent REIT SL Green Realty Corp.'s (collectively SL Green or ‘the REIT') preferred stock rating has been downgraded to Ba3 from Ba1, consistent with the notching guidelines for REIT issuers, and a corporate family rating of Ba1 was assigned. Moody's also assigned a speculative grade liquidity rating of SGL-2 to SL Green Operating Partnership, L.P. The rating outlook was revised to stable from negative.The stable rating outlook reflects SL Green's high quality portfolio, its predictable cash flows and proven access to multiple sources of capital.The following ratings were downgraded:..Issuer: SL Green Operating Partnership, L.P.....Junior Subordinated Shelf, Downgraded to (P)Ba2 from (P)Ba1....Subordinated Shelf, Downgraded to (P)Ba2 from (P)Ba1....Senior Unsecured Shelf, Downgraded to (P)Ba1 from (P)Baa3....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1 from Baa3..Issuer: SL Green Realty Corp.....Junior Subordinated Shelf, Downgraded to (P)Ba2 from (P)Ba1....Subordinated Shelf, Downgraded to (P)Ba2 from (P)Ba1....Preferred Shelf, Downgraded to (P)Ba3 from (P)Ba1....Preferred Shelf Non-cumulative, Downgraded to (P)Ba3 from (P)Ba1....Senior Unsecured Shelf, Downgraded to (P)Ba1 from (P)Baa3....Preferred Stock, Downgraded to Ba3 from Ba1....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1 from Baa3The following ratings were assigned:..Issuer: SL Green Operating Partnership, L.P..... Corporate Family Rating, Assigned Ba1.... Speculative Grade Liquidity Rating, Assigned SGL-2Outlook Actions:..Issuer: SL Green Operating Partnership, L.P.....Outlook, Changed to Stable from Negative..Issuer: SL Green Realty Corp.....Outlook, Changed to Stable from NegativeRATINGS RATIONALESL Green's Ba1 rating reflects the solid operating performance of its high quality portfolio of Manhattan office assets, laddered lease maturity schedule and diversified tenant base. Its elevated leverage metrics, significant geographic and asset concentration, and financial policy that includes material stock buybacks are other key credit considerations.The REIT's aggregate and secured leverage ratios, including its pro-rata share of unconsolidated joint ventures, are weak due to its capital strategy – high proportion of mortgage debt, financial policy- its stock buyback program, and large development exposure. At YE 2021, the REIT's effective leverage ratio (debt + preferred to gross assets) was 56.8% and secured leverage was 35.5%, including pro-rata share of JV investments. With the same adjustments, the net debt + preferred to EBITDA was 13.9x and has been above 12x since Q1 2021. SL Green's effective and secured leverage metrics are moderate when calculated on a consolidated GAAP basis at about 41.1% and 10.8% respectively, however net debt + preferred to EBITDA is high. Even with healthy earnings (EBITDA) growth of 3% over the next two years, the REIT's net debt + preferred to EBITDA ratio is expected to be elevated, in the 11.5-12.0x range, at YE 2023. SL Green's fixed charge coverage has been steady at above 2.0x, was 2.1x at YE 2021, over the last few years.The operating environment for New York office landlords has been challenging over the last few quarters with low office utilization, increasing vacancy rates, and a decline in investment activity. However, top-tier assets have outperformed the market by a sizeable margin. According to CBRE-EA, Manhattan office vacancy rate increased by 600 bps since YE 2019, however SL Green's same-store leased occupancy declined by only 320 bps in the same period. Higher quality office properties with laddered lease maturity schedules were also less vulnerable to rising tenant concession packages that resulted in lower net effective rents. Given the current expectations of recovery in utilization and leasing, and a moderate supply pipeline, we expect SL Green's operating metrics like occupancy, renewal pricing and same-store NOI to improve over the next few quarters.With SL Green's focus on the Manhattan office market, geographic concentration has always been a credit challenge. A decline in the number of the assets and a significant increase in the share of NOI generated by a few large properties such as One Vanderbilt has increased asset concentration risk. Tenant and tenant sector concentrations are moderate and the lease maturity schedule is laddered with 17.5% of annualized lease rent expiring through YE 2023.Since YE 2019, the REIT has spent about $950 million on stock and operating unit repurchases in addition to the $580 million of common dividend payments and had about $300 million of remaining capacity on the $3.5 billion buyback program at YE 2021. We expect that dispositions in 2022 will be used to fund additional share repurchases and the REIT could expand the authorization or launch a new program. Although the buyback program has not meaningfully affected SL Green's liquidity position, the sale of high quality cash-flowing properties to fund the buyback program has contributed to the consistently high leverage ratios. We believe that the strategy is unlikely to change significantly over the next couple of years.The REIT's SGL-2 rating for liquidity reflects $860 million of availability on the REIT's $1.25 billion unsecured revolving credit facility, a high quality unencumbered asset base, construction financing for the development underway and good capital access.SL Green's operating performance and financial metrics will be supported by the predictable cash flows from the high quality portfolio and proven access to debt financing, hence the rating outlook is stable.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe rating could be upgraded if net debt + preferred to EBITDA is 10.5x or lower, fixed charge coverage is above 2.2x, and secured leverage is close to 30%, all on a sustained basis and including prorata share of joint ventures. Favorable operating trends including improvement in occupancy and 5% or higher cash releasing spreads, and sound liquidity would be some other important considerations.Fixed charge coverage deteriorating to below 1.9x, net debt + preferred to EBITDA above 13.0x on a sustained basis and including prorata share of joint ventures, weak operating metrics or liquidity challenges would create downward rating pressure.SL Green Realty Corp. (NYSE: SLG) is a real estate investment trust that owns, operates and acquires primarily commercial office properties in the Manhattan submarket of the New York metropolitan area. As of December 31, 2021, SL Green held interests in 73 buildings totaling 34.9 million square feet via ownership interests and debt and preferred equity.The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1272320. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Ranjini Venkatesan VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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