SL Green Realty Corporation’s SLG debt rating for its senior unsecured borrowings has been affirmed at Baa3, by Moody’s Investors Service — the rating division of Moody’s Corporation MCO. Further, the rating agency has maintained a stable outlook for SL Green.
Simultaneously, the rating agency has affirmed all other outstanding ratings for the company’s operating partnership — SL Green Realty Operating Partnership L.P. Also, the outlook has been maintained at stable.
Rationale Behind Ratings and Outlook Affirmation
The reiteration reflects the real estate investment trust’s (REIT) premium Manhattan office portfolio, solid liquidity position and a diligent share-buyback program. Nonetheless, geographic concentration of assets, weak fixed-charge coverage ratios and high leverage metrics remain concerns.
Particularly, SL Green’sdominance in the large and high-barrier to entry New York real estate market,with an enviable office footprint, has enabled it to enjoy high occupancy at its portfolio. In fact, the company’s Manhattan portfolio was 95.7% occupied during the Jul-Sep period.
Further, Moody’s acknowledged the company’s efforts in reducing exposure to suburban office assets. In fact, over the last four quarters, it has shed 12 suburban office properties and declined suburban exposure by nearly 50%, in terms of space.
Additionally, the rating agency is positive on the company’s solid liquidity position, supported by a largely undrawn revolver worth $1.5 billion, large base of unencumbered assets and manageable near-term debt maturities.
Nonetheless, SL Green’s two extensive development projects — One Vanderbilt and One Madison Avenue — will require huge capital outlays and might affect its liquidity position.
In addition to this, Moody’s believes the REIT's higher leverage ratios — net debt and preferred to EBITDA of 9.5x, and secured leverage of 29.9% — remain key concerns for the company. Moreover, its strategy to monetize assets in order to fund the company’s large development pipeline and share repurchases will likely affect EBITDA and leverage metrics over the next 12-18 months.
Moody’s noted that share buyback has been an essential part of the company’s capital strategy, with SL Green repurchasing 7.5 million shares amounting to $729 million in outlay, in the first three quarters of the year. However, the rating agency is of the view that continuous asset disposition, in order to carry out these buybacks, will further weaken the company’s coverage ratio including pro-rata share of joint ventures of 2.3x.
Zacks Rank and Price Performance
SL Green carries a Zacks Rank #3 (Hold), at present.
Shares of the company have underperformed its industry over the past three months. In fact, its shares have declined 12.1%, while the industry incurred a loss of 1.7% during the same time period. Also, the Zacks Consensus Estimate for the company’s 2018 funds from operations (FFO) per share has been revised marginally downward over the past week.
Stocks to Consider
Better-ranked stocks from the real-estate space include PS Business Parks, Inc. PSB and OUTFRONT Media Inc. OUT, carrying a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PS Business Parks’ Zacks Consensus Estimate for 2018 FFO per share moved 0.5% north to $6.45 in the past two months.
OUTFRONT Media’s FFO per share estimates for 2018 have been revised 2% upward to $2.09 in two months’ time.
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