Stock Analyst Notes
by Todd Lukasik, CFA | 10-27-09 | 12:20PM |
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As in recent quarters, we were impressed by SL Green Realty's SLG third-quarter operating performance. This New York office landlord's year-to-date performance has exceeded our expectations, and we are increasing our near-term forecasts, resulting in a slight increase to our fair value estimate. However, we still expect its future results to deteriorate in the face of a weak Manhattan rental market, and our long-term assumptions are largely unchanged.
For the quarter (on a year-over-year basis), operating revenue fell about 1% but earnings before interest, taxes, depreciation, and amortization rose slightly to $116.6 million, thanks mainly to general and administrative expense savings. (Our measures of operating revenue and EBITDA exclude certain investing and financing items SL Green includes in its reported revenue and EBITDA.) Other operating metrics held up well, with SL Green's Manhattan occupancy rate at 95.7%, about 500 basis points higher than the average in its core midtown Manhattan submarket. The firm also achieved positive leasing spreads (the difference between the rental rates on new versus expiring leases) of 5% for its Manhattan leases. This is down meaningfully from recent historical spreads, however, and tenant concessions were significant, including nearly seven months of free rent and tenant improvement allowances of $56 per square foot on average (with an average lease term of 9.6 years). We view these as signs that the weak Manhattan leasing market is beginning to negatively affect SL Green's business, and we expect weakness in its financial results to follow.
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