SL Green Realty Corp. (NYSE: SLG) is a real estate investment trust, or REIT, that owns and leases office space to corporations in Manhattan. The company owns more than 30 New York City office properties totaling over 22 million square feet. In 2007, SL Green cemented its position as the Big Apple's largest landlord when it acquired Reckson Associates Realty Corp. The transaction added a total of 9 million square feet to its portfolio, including over 5 million square feet of suburban offices and 4 million additional square feet of prime Manhattan office space.
Over the past few years, SL Green has benefited from Manhattan's low vacancy rates, increasing rents and rapidly increasing commercial property prices, particularly in the red-hot midtown market. These were primarily the effects of a strong New York City economy and cheap, widely available debt. However, in the summer of 2007, financial institutions began suffering significant losses due to the subprime crisis. This crisis poses a double threat to SL Green. First, by weakening the financial sector, the heart of the New York economy, it threatens to crimp demand for office space in the company's core market. Second, as financial institutions have reigned in risk and tightened lending practices, credit has become more difficult to access which may hamper SL Green's ability to fund its own acquisitions and may hurt the overall value of its portfolio by limiting demand.
SL Green boasts that it is the only REIT that focuses solely on the New York office market. Indeed, SL Green's expansive Manhattan office properties represent the core of its portfolio. The company owns over 30 office properties in Manhattan comprising over 22 million square feet including some of the City's most highly coveted properties in midtown Manhattan. In addition to its office properties, SL Green also operates a much smaller portfolio of buildings that it leases to retailers, mostly on the highly coveted Fifth Avenue. As of 2006, SL Green's retail locations totaled approximately 400,000 sqft. SL Green's prime properties allow it to boast the highest occupancy rate of its competitors. As a result, SL Green commands high rents that have increased significantly over the past few years. In 2006, SL Green SL Green received approximately $365 million in rental revenue per year with most of this rental income coming from its pricey New York office buildings.
In early 2007, SL Green closed the acquisition of Reckson Associates Realty for approximately $6.0 billion. The Reckson acquisition cemented SL Green's position as New York's largest office landlord, adding 4.2 million sqft to SL Green's Manhattan portfolio. The acquisition also included an addition 5 million sqft located in suburban locations including Queens, Westchester, Long Island and Stamford, Connecticut.
Sales and Acquisitions: Given the proper opportunity, SL Green may either acquire or sell properties. By adding buildings to its portfolio, SL Green increases its rental income, although new rental income is often offset by increased debt payments. Appreciating commercial real estate prices over the past few years often provided SL Green the ability to sell its more marginal properties at a significant profit. For example, in 2006, SL Green realized a $94 million gain when it sold 286 and 290 Madison Avenue.
Structured Finance SL Green also engages in structured finance and joint ventures. A typical structured finance deal involves borrowing at low interest rates and lending this money to more risky borrowers at a much higher interest rate. SL Green captures the spread between these two interest rates as profit.
The subprime crisis and the resulting credit crunch have had a direct effect on SL Green. The credit environment has a particularly pronounced influence on office REITs because they typically rely heavily on debt for acquisitions, development and property sales. Traditionally, 60 to 70% of the financing for the development or acquisition of offices space came from loans from pension funds or insurance companies. These loans were sized so that rent payments from a building could cover the amoritized loan payments. Over the past five years, as investment banks, hedge funds and private equity groups provided new sources of funds to the market, cheap credit fueled rapidly appreciating commercial property prices, as buyers funded developments and acquisitions with up to 90% debt, assuming that rents and property values would rise to cover interest payments. This effect was especially pronounced in red-hot Manhattan, SL Green's core market. In August 2007, however, financial institutions began booking large losses due to their low lending standards and the resulting subprime crisis. Since then, large financial institutions have become more reluctant to lend, reigning in risk by tightening credit standards. Tighter credit conditions may limit SL Green's acquisition and redevelopment strategy while negatively impacting the value of its office buildings.
SL Green is exposed to the subprime crisis in a second important way. Since September, commercial and investment banks including Citigroup, J P Morgan Chase (JPM) , Merrill Lynch and Morgan Stanley have lost billions of dollars due to write downs on subprime mortgage-backed assets. Because the finance and banking sectors are such an integral part of New York City's economy and, in turn, Manhattan real estate, further weakening in these sectors will hurt SL Green by dampening demand for office space in its core market. Already, firms such as Bear Stearns and Citigroup have begun to announce significant lay-offs. SL Green is more generally exposed to the risk of a slowing U.S. economy and a possible U.S. recession. If layoffs in the automotive industry, residential construction, and the financial sector are followed by more layoffs in the broader economy, unemployment could increase vacancies and depress rents even in the most resilient markets.
SL Green's heavy concentration in the high profile Manhattan office market makes it susceptible to the threat of terrorist attacks. After the attacks of 9/11, rents fell dramatically throughout Manhattan and companies sought to relocated to safe, suburban settings. If a terrorist attack struck New York again, it would sap demand and depress rents. Furthermore, an increased terror threat could substantially increase insurance coverage premiums, increasing costs.
Market share is listed by 2007 revenues. In 2007, SLG held 10% of total U.S. office REIT market share, and was the third largest office REIT by revenues. There are 14 U.S. exchange traded REITs focusing on office properties. Of those, the top three Boston Properties (BXP), Brookfield Properties (BPO) and SL Green Realty (SLG) accounted for just over half of Market Share by 2007 revenus.
|Company||Operating Cash Flow||Debt||Square Feet in Portfolio||Markets||Property Occupancy|
|HRPT Properties Trust (HRP)||$298.96 m||$2.71 B||64,000,000||Five largest markets: Hawaii, Pennsylvania, New York, Texas, Massachusetts. But owns real estate throughout United States.||92.8%|
|Mack-Cali Realty (CLI)||$250.17 m||$2.13 B||33,733,011||New Jersey, New York City, Pennsylvania, Connecticut, Washington D.C., Maryland, Massachusetts||92.2%|
|Brookfield Properties (BPO)||$45 m||$12.59 B||73,200,000||New York City, Boston, Washington D.C., Houston, Los Angeles, Toronto, Calgary, Ottawa, Denver, Minneapolis||95%|
|SL Green Realty (SLG)||$401.72 m||$5.35 B||30,220,700||Manhattan, Brooklyn N.Y., Westchester N.Y., Connecticut||about 95.7%|
|Silverstein Properties (Privately owned)||-||-||7 million, also own WTC site in Manhattan||Manhattan||-|
|Vornado Realty Trust (VNO)||$824.92 m||$12.58 B||about 64,000,000||New York City, Washington D.C., retail properties throughout United States||94.67%|
|Boston Properties (BXP)||$598.07 m||$5.41 B||44,100,000||Midtown Manhattan, Boston, Washington D.C., Princeton N.J., San Francisco||94%|