SL Green Posts $44M Loss In Q2 Amid 'Difficult’ Capital Markets Environment

SL Green posted a net loss in the second quarter of the year, as leasing deals dropped back and company leaders foreshadowed a ramped-up focus on shedding debt.

“The capital markets are more difficult now than they've been in a long time, primarily driven by a dearth of debt capital,” SL Green CEO Mark Holliday said during an earnings call Thursday.

“But this is a market where reputation, relationship and record come into play — and there's a diversion of people who can get things done and people who are going to have a harder time getting things done.”

The REIT recorded a net loss attributable to common stockholders of $0.70 per share, or $43.9M in Q2, compared to a net income of $1.56 per share, or $105.3M in the same time period last year. Of that loss, $70.7M, or $1.02 per share, was from the sale of real estate interests and noncash fair value adjustments, compared to $108M of gains in the second quarter of 2021. Funds from operations at the end of the quarter were $1.87 per share or $128.8M.

Major deals of the quarter included the acquisition of 450 Park Ave., for which SL Green paid Oxford Properties $445M in a deal that closed in June, its first office purchase since 2018. It also sold the vacant office condominium at 609 Fifth Ave., formerly home to a WeWork, for $100.5M. The transaction generated net cash proceeds to the company of $97.2M, according to the REIT.

“It's a market that I think has a lot of headline overhang right now — but I do think there is a lot of good news out there in the market directionally that we can build upon throughout the rest of this year and next year,” Holliday said. “This recovery [in New York] was never expected to be immediate.”

SL Green Chief Financial Officer Matthew DiLiberto said FFO in the first half of the year exceeded internal projections, and the company is on track to meet a normalized FFO guidance range of $6.70 to $7 per share this year. He said, however, the projections now trend to the lower end of that range, as the impacts of interest rates on floating rate debt take hold.

Debt repayment and meeting the “relatively small” equity needs of its development and redevelopment projects are now a focus.

“To mitigate the effect of those rising interest rates on earnings and especially cash flow, while further enhancing the balance sheet, we've pivoted our capital allocation strategy to prioritize debt repayment, particularly in corporate unsecured debt,” DiLiberto said.

The REIT did not originate any new debt preferred equity investments in the second quarter for the first time “in recent memory,” DiLiberto said, nor did it repurchase any shares. He added capital will still be used creatively to grow the business, especially in asset management.

“In the current environment, we feel this capital allocation pivot is the most prudent path for right now,” he said, adding that in the current market the acquisition loan Wells Fargo provided at 450 Park and the $370M refinancing at 100 Church St. are considered “landmark” deals.

“The CMBS market is pretty much seized up, you have to turn to banks. And you know, banks are being selective about the sponsorship and the buildings on which they'll lend,” DiLiberto said. “You know, we feel good that it sets us up well, we also don't have a lot of maturities upcoming.”

On the leasing front, the company experienced something of a slowdown. The portfolio is 92% leased, including leases signed but not yet started. Some 76 lease deals in Manhattan were signed in the first six months of the year — a 12% decrease from the year before.

The average lease length in Q2 was six years, with 4.6 months of free rent and a tenant improvement allowance of $43.16 per rentable square foot, not including leases signed at One Vanderbilt.

Holliday said there is an active pipeline of 1.1M SF of leases and transactions that the company is working to close before the end of the year.

Physical occupancy across its portfolio was the highest it's been in two years in July, he said, sitting at 45% — adjusted to 55% on “peak days” of Tuesday, Wednesday and Thursday. Holliday said he expects those numbers to improve markedly in September. 

There are indications that office usage is going in the opposite direction, particularly among tech firms. Last week, Amazon paused construction on five office towers in Washington state and one in Tennessee, citing remote work and uncertainty about hybrid work. Facebook has decided it doesn’t want to take another 300K SF it planned to lease at 770 Broadway in New York — and halted its build-out in Hudson Yards — while it assesses how it wants to use its office space going forward, Bloomberg reported last week. Amazon reduced the amount of space it had planned to take from JPMorgan Chase & Co. at Hudson Yards, per the publication.

But Holliday said any potential retraction of the technology company from the office market is not something to be concerned about.

“Some of the big technology tenants which expanded rapidly have pulled back as they adapt to new workforce patterns, but financial firms continue to be very active in this market,” Holliday said.

“[Finance firms] also account for a disproportionate amount of our pipeline … So we're happy to see that that sector is taking up a little bit of slack for the technology sector.”