2023-10-27 14:48:25 ET
Summary
- SL Green reported exceptional progress in refinancing, reducing debt by over $3 billion since the beginning of the fiscal year.
- The market is worried about the retirement of the President, Andrew Mathias, who guided the company to exceptional results for a quarter of a century.
- The new president will have big shoes to fill, but the transition is expected to be smooth with an active board involved.
- REIT's can adopt to higher interest rates permanently. But there will be a transition involved.
- Announced joint ventures and a light asset campaign reduce the need for debt.
SL Green ( SLG ) reported results that really should have been expected with the exceptional progress they made in refinancing. Debt is now dow n more than $3 billion since the beginning of the fiscal year. It's now down in a way that permits profit recovery and then some. But the really big news is the retirement of the president, who will remain on the board. That president guided the company to exceptional results for a quarter of a century. That means that the incoming president will have some very big shoes to fill.
Given the nature of the business, the whole REIT portfolio is unlikely to materially change overnight. Therefore, it will take some time for investors to see the results of the actions taken by the current president. So, there's no immediate danger of a significant change in strategy. Most likely, it will be the next boom time period when a decision is made to buy or sell that investors will be able to tell how this new president is doing.
The Announcement
Andrew Mathias, President, SL Green, will step down on Dec. 31, 2023, when his contract ends.
He was noted for his accomplishments in the following way:
" Among other notable recognitions, Mr. Mathias was featured in the Crain’s New York Business “40 Under 40” in 2007 and has been named to the New York Commercial Observer “Power 100” over a dozen times. He has been honored by major institutions such as Pace University and Memorial Sloan Kettering, and currently serves on the Board of Directors for the Regional Plan Association."
This was noted in his statement that he was leaving. Not every president has these kinds of accomplishments during their tenure. It marks him as a rare individual in the REIT sector.
Under his tenure, SL Green, this year has accomplished a debt reduction that the market never thought possible.
The fact that the announcement has Marc Holiday, chairman of the board, making a statement could imply a very active board that will be involved in the transition to a new president. There's at least one article discussing how active this board is.
That could make this a smooth transition that shareholders will not notice. The new president will be a company person who has been with the company a long time and is familiar with the operations. That also can make the transition very smooth.
Third Quarter Results
Third quarter guidance for the year was changed to primarily account for the outgoing president. Things like debt coverage are getting on the tight side.
Later on, the company did show that some of the renewals were less than the current rent. But the big deal here is probably that the vacancy rate is slowly inching down.
As the company fills spaces, there are various allowances given in those deals. This likely means that cash flow will not see the benefits of new leases for some time. But the end of expiring leases will be felt right away. The market may be in no mood for that kind of news.
This company has some major rehab projects underway. As they get done, there will be more space. It's hard to tell right now how the timing of completions will affect the results. Many times, a project itself can be capitalized. But once they begin filling the vacancies, then expenses turn to operating expenses.
Management so far has accomplished debt reduction by being realistic with prices. The previous articles have noted that management has pretty much gotten what it stated it would in guidance, with several appraisal values (or management opinions) affirmed along the way. This is happening despite market fears that there would be "markdowns" from guidance to get the job done.
High Interest Rate Fears
The market is concerned about the effect of extended periods of higher interest rates on REITs like this one. But we have not even gotten to an extended period yet. So, there's plenty of time for this management and really the whole industry to have a strategy for something like that should it become obvious.
Management already announced joint ventures which reduce or eliminate the need for debt in exchange for sharing the profits.
But the key to interest rates is the inflation outlook. Right now, inflation is declining, even if the market thinks the current rate is "stubborn." The other key is the general budget deficit combined with the Federal Reserve interest rate policy.
We just got done overheating the economy by having rising general federal budget deficits combined with an easy money policy (low interest rates) when the pandemic hit and effectively left us with no good choices. Essentially, the inflation that followed could have been prevented entirely. I still have my Samuelson textbook that used to be a major college economics textbook for this type of situation. This part of economics has not changed in decades.
The other part is that we survived very high interest rates in the 1970s. If REITs back then could survive that atmosphere, the current situation should be relatively easy. Therefore, there's a very good chance that current market fears are overblown. There's always a transition period if the worst market fears happen. But transition is very different from a permanent end.
Going Forward
SL Green is changing presidents at a time when interest rate fears dominate the REIT scenario. But unless interest rates remain high for several years, this REIT and really the whole industry will not see a major effect from the current situation.
The government deficit is coming down under the current administration. It does need to come down more. But progress is being made against the rising deficits of the past administration. Furthermore, the Federal Reserve is now pursuing a policy to offset those deficits. The future will depend largely upon the will of the people to cut government spending and the determination of the Federal Reserve to control inflation. Right now, that future looks pretty good. Permanent high interest rates do not appear to (any longer) be the worry that economists originally thought.
In the meantime, the new SL Green president has some big shoes to fill. However, he's an insider with a whole lot of company experience. The transition should be smooth. But Mr. Market appears worried about the transition. Those worries should fade because this company has a lot of projects underway that simply need to be completed. It will take a while, given the size of purchases and sales, for the presence of this president's actions to become obvious to shareholders.
The third quarter report now has a pretty big list of accomplishments that the market thought would never happen. However, the market overall is still worried about the near and immediate future. The debt ratios are tightening, and new leasing rates are declining in at least some areas.
Nonetheless, the company appears to be strongly performing in a downturn. It's therefore very likely to continue that performance in a continuing REIT recovery. Location is very important in real estate, and this company appears to have that location advantage so far, along with realistic assessments as to what can be accomplished in the current environment. The strong buy remains as long as the outperformance continues, even with a new president beginning the job in the new fiscal year.
For further details see:
SL Green: Changing Of The Guard