SLG - SL Green Preferreds: Office Markets Rationalizing With Redevelopments In NYC

2024-06-12 12:21:26 ET

Summary

• The preferreds are clearly discounted from liquidation value due to the pretty evident risks of the preferred income. SL Green Realty Corp. preferred shares and common present real capital impairment risk.
• It's not really sustainable given office trends unless in the broader markets the redevelopment effort for residential takes hold, and that SL Green Realty's developments add lots of income.
• We think there is a relevant proportion of NYC office real estate that will attract redevelopment effort. But not all properties are valid targets due to the very high costs.
• SL Green Realty Preferreds reach home base if office rents rationalize upwards with broad redevelopment efforts, being supported by local government, and continued creditor cooperation.
• Creditors have been enormously helpful, likely because they know the disastrous consequences, possibly to the whole US financial system, if they aren't.

SL Green Realty Corp. Preferreds ( SLG.PR.I ) continue to show distress, trading meaningfully below liquidation preference value and with incomes under substantial pressure as the rent situation in its Manhattan markets crystallizes at significantly lower levels per square foot. They are still paying the dividend, contrary to worries in our last article from more than a year ago, and they are managing to refinance things as apparently creditors are willing to give them a chance, but the dangers are big here. In particular, we don't believe the scope for redevelopment is that large or attractive enough, with repurposing costs being similar to costs of developing from scratch - even though a 10-20% proportion of their portfolio can be quite efficiently redeveloped for strong incremental profit....

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