SL Green's Sluggish Leasing Sends Stock Tumbling As REIT Readies For Turnaround

SL Green likely won't meet its occupancy goals this year, its executives admitted, as leasing up the largest office portfolio in New York City has happened slower than expected.

But CEO Marc Holliday said on the company's earnings call Thursday afternoon that the portfolio saw an uptick in same-store occupancy for the first time in 16 quarters, since before the pandemic delivered the office market a blow from which it has yet to recover.

"This is an important moment that symbolizes the stabilization of our portfolio," Holliday said on the call. "The trend is in our favor, with more companies calling employees back to work."

Holliday had set a goal of hitting portfolio-wide occupancy of more than 92% by the end of the year. At the end of the third quarter, occupancy was 89.8%, up just 10 basis points from the second quarter.

"We had a very heady goal, north of 92%. We will not make that goal," SL Green Executive Vice President and Director of Leasing Steven Durels said on the call. "We have a pretty good pipeline … but deals are taking longer to get done, therefore occupancy is picking up, but at a slower trajectory than we had anticipated."

The slower-than-expected leasing helped lead to a sell-off in the REIT's stock, which was down more than 9% as of Thursday afternoon. The executives touted the pipeline of leases they expect to close by early 2024 and said the occupancy target was "a stretch goal," not an internal projection.

"The 92-whatever was an ambitious goal — to get to 7.5% vacancy in a market that’s 18% vacancy," Holliday said. "Obviously, in doing that, we’re trying to be realistic, but trying to push ourselves."

The company also set a goal of 1.7M SF leases signed in 2023; after signing 356K SF of deals in the third quarter, it has leased nearly 1.3M SF through nine months of the year.

The REIT reduced its projected earnings guidance as a result of the severance it will pay from not renewing President Andrew Mathias’ contract. The longtime executive will leave his role at the end of the year, but keep his seat on the company's board. Starting next year, the company will save roughly 15 cents per share by letting go of Mathias, Piper Sandler analyst Alexander Goldfarb wrote in his analysis of SL Green’s earnings for the quarter.

"This amount is not insignificant, especially when the market is focused on refinancing headwinds and general office fundamentals," Goldfarb wrote. 

On the call, which was Mathias' last, Holliday said not renewing the contract was "a very hard decision," but was a good move for the company and will allow younger talent to take on more of a leadership role.

"It has truly been a long, amazing run for a kid from Buffalo who never expected anything like this kind of experience in his life," Mathias said.

The company posted a net loss in the quarter of $24M after posting a $7.4M  profit during the same quarter in 2022. Its funds from operations also tumbled from $1.66 per share last year to $1.27 at the end of this quarter. Its revenue during the quarter hit $173.2M, down from $212.4M in Q3 2022.

On the sales side, SL Green announced it has entered into an agreement with its joint venture partners to sell equity interests in retail condo units at 21 East 66th St. for $40.6M, in a deal the REIT said it expects to close over the coming quarter. 

Meanwhile, the office giant grew its holdings by taking a 90.4% ownership interest in 625 Madison Ave., a 583K SF Class-A office tower in Manhattan’s Plaza district, after it foreclosed on the property and took it over from Ashkenazy Acquisition Corp.

Additionally, the REIT's 1.4M SF One Madison Ave. office development wrapped up construction three months ahead of schedule and received its temporary certificate of occupancy. Its completion triggered the final equity payment of $577.4M from its joint venture partners, which Holliday said the company used to pay down unsecured debt.

The REIT has spent the quarter pursuing arrangements to reduce its debt, extending two loans combining for more than $100M. So far this year, it has extended or refinanced $3.2B in loans and reduced the company’s debt by $1B.

Holliday said on the call that the action it has taken to reduce its debt and sell off assets will allow it to pivot toward a new business plan — acquiring properties, starting next year. Before that, the company still is looking to sell more equity in its signature project, One Vanderbilt, which could close before the end of the year.

"We are ready for this moment of great opportunity, and we intend to take advantage of market repricing," Holliday said.