SL Green Quiets Doubters As Leasing, Debt Deals Boost Cash Flow

Despite revenue being down nearly 10%, SL Green has again worked its magic to beat Wall Street’s expectations for an office landlord.

The company increased its funds from operations, a measure of cash flow for real estate investment trusts, to $2.05 per share for the second quarter of the year, up from $1.43 per share during the same period last year. Analysts estimated the company to report FFO of $1.62 per share this quarter.

So far, it’s seemingly a success story for a company that was prey for short sellers just a year ago.

The company signed 38 office leases in its Manhattan office portfolio totaling 421K SF, below the 634K SF of leases it signed across 60 buildings last year. Along with its earnings release, SL Green announced that it signed 367K SF of leases in July alone, including an Ares Management renewal and an expansion for more than 307K SF at 245 Park Ave., up from 175K SF. 

During the call, executives said they have more than 1.2M SF of additional leasing pending, which would bring it past its stated goal of signing 2M SF of leases in 2024. Its average rent on those leases was above $100 per SF, the company said in its earnings release. 

“We are vastly outperforming a still-unsettled commercial real estate market,” SL Green CEO Marc Holliday said during a call with investors Thursday.

The gains were attributed to the company’s ability to rework and extinguish debt on 280 Park Ave. and the sale of 719 Seventh Ave. for $30.5M plus other fees. 

At 280 Park Ave., the joint venture of SL Green and Vornado Realty Trust modified and extended its more than $1B mortgage, as well as modified the $125M mezzanine loan and subsequently repaid it for the discounted price of $62.5M. The sale of 719 Seventh allowed SL Green to repay its existing $50M mortgage for $32M and pocket $3.6M.

SL Green also closed on the sale of 625 Madison Ave. for $634.6M, generating net proceeds of nearly $200M, according to the company’s report. The buyer, Related Cos., now plans to build a condo and hotel project on the site. A venture of SL Green and Winthrop Capital Advisors provided $235.5M in preferred equity to close the sale.

The deals were previously announced in the REIT’s first-quarter earnings report, but the closings add to a string of deals by SL Green that have shown its ability to escape debt predicaments at older office buildings that are giving some of its peers trouble. Earlier this year, the company managed to settle its $182.5M mortgage for 2 Herald Square for just $7M, dazzling analysts.

The REIT currently has interests in 55 buildings totaling 31.8M SF and is New York City’s largest office landlord — a reputation that has drawn eyes as the office vacancy has risen. At the end of April 2023, more than 28% of the company’s publicly traded shares were held by short sellers — a percentage that fluctuated slightly in the following months.

But the REIT’s performance has managed to quell some of that pessimism. At the end of the second quarter, 19.7% of the company’s float was shorted, the first time it has been below 20% since March 2023, according to Marketbeat data. The percentage is still elevated, as short interest below 10% indicates strong positive sentiment.

The REIT reported $223M in revenue for the second quarter of the year, down from $246M during the same period last year. 

SL Green is looking outside of the asset class. Holliday, who has advocated for office-to-conversion incentives from the city and state, already has plans to convert 750 Third Ave. into apartments where 100 or more units could be affordable. He said the project will be in construction in early 2025.

“It's going to set the standard in terms of conversions of that vintage of office building in Midtown to something that I think will be a real destination,” Holliday said. 

The REIT also has a $1B debt fund focusing on New York City. Additionally, company executives said that asset management and special servicing is becoming a greater portion of its business, with over $3B of active special servicing and asset management deals and another $6B where the company is named special servicer.

“Special servicing and asset management for us is really an exponentially growing opportunity,” Holliday said.