SL Green To Raise $1B NYC Debt Fund, Forecasts Growth After Painful Year
Manhattan’s largest office owner is predicting a change in its fortunes in 2024, raising a large fund and raising the guidance it is giving its shareholders on its anticipated returns this year.
SL Green will begin fundraising for a $1B opportunity debt fund this month, it announced in its fourth-quarter earnings report, released Wednesday. The office giant also reported a $155M net loss for the quarter, up from $64.3M in Q4 2022, and a year-over-year drop in its funds from operations, a metric of cash flow for REITs, from $100M to $49.7M.
But despite the drop in performance, the REIT revised its earnings guidance for 2024 upward by a dollar per share.
"We believe the market has essentially hit bottom," SL Green CEO Marc Holliday said on the company's earnings call Thursday afternoon.
The debt fund will emerge as office owners need to refinance but face a high cost of capital and reluctant lending from traditional sources such as banks. SL Green last year stated its intentions to begin an opportunity debt fund this year, but it had previously expected to launch within the first six months of 2024, Bloomberg reported.
On the call, Holliday said it is still to be determined how much of the $1B in the fund will come from SL Green and how much will come from outside investors.
"We tend to like to have real skin in the game. We’re investors as much as we’re managers of monies for others, but it has to fit within our overall liquidity program for the year," he said.
SL Green missed its office occupancy targets for the year, despite signing 26 Manhattan office leases spanning 505K SF. The REIT finished 2023 with 90% of its portfolio leased, 0.01% higher than the previous quarter and 2% below its target of 92% by the end of 2023.
However, office tenants began to pay more for space at SL Green’s properties in the final quarter of 2023. The landlord was able to increase average starting rents on previously leased space during the quarter by 3.2%.
In the final month of the year, the REIT also closed on a loan modification for 185 Broadway, a 45K SF office building in the Financial District. SL Green paid $20M to modify and extend the debt, switching from a floating-rate loan to a fixed rate of nearly 6.7% until November 2025, when it reverts to a floating rate until it matures a year later.
The move is indicative of the financing environment, in which lenders are hesitant to modify or extend loans unless building owners put equity back into the building.
The office giant also closed on the sale of its share of the retail at 715-717 Fifth Ave. to Gucci parent company Kering, which shelled out $963M for the 115K SF property on Manhattan's priciest retail corridor. SL Green said it expects to reap $27.6M from the sale of its 11% stake. Jeff Sutton owned the other 89% of the property.
"These deals developed quickly and confidently, and I think it’s very exciting for the city," Holliday said, adding that the deals defy a long-running narrative about the death of Manhattan retail.
The rollout of the debt fund was still the most significant update on the earnings call, and Holliday said it is indicative that investors are ready to pile back into office properties in the country's largest market.
"Billions and billions of dollars are forming for debt and equity. A significant amount is going to be targeted toward the office sector. That’s the first sign [of recovery]," he said on the call. "There’s a lot of other buildings out there that need to be attended to. I think you're going to see liquidity break, and the first steps are these capital pools forming. And the institutions will follow right behind."
