Morningstar | SL Green Reports Slightly Soft Earnings, but We Are Maintaining Long-Term View
SL Green reported a reasonable third quarter that was slightly below our expectations, but these results do not change our long-term view of the firm, and we do not anticipate making major changes to our fair value estimate of $114 per share or no-moat rating. Although revenue dropped from the third quarter in 2017, which reflects continued softness in Manhattan re-leasing spreads versus our long-term expectations, 5% versus our expected 12%, we are withholding judgment for the moment because these results were skewed by two leases with a negative re-leasing spread. When these leases are removed from the mix, SL Green’s re-leasing spreads look more in line with our expectations. Longer term, we continue to see revenue growing at a mid-single-digit pace, which reflects our broader assumptions that New York City is a major technology hub and that top tenants will pay premiums for the highest-quality properties. The softness in re-leasing spreads was partially offset by higher-than-anticipated occupancy in the Manhattan portfolio. The net result is that the bottom line funds from operations were below our quarterly expectations by a modest 2%.The big topic for investors continues to be SL Green’s development portfolio, particularly the megaproject One Vanderbilt, which will be one of the tallest buildings in New York when it opens in 2020. We are impressed by the continued demand for this high-end property, as the Carlyle Group signed a large lease for another chunk of the building. The building is almost 40% preleased, with over a year left before it opens, and it is encouraging to see the continued strength in high-end office demand given the substantial investment SL Green has put into the property.
SL Green Realty is a self-managed real estate investment trust. The company is engaged in the acquisition, development, ownership, management and operation of commercial and residential real estate properties, mainly office properties, located in the New York metropolitan area. Substantially all of the company's assets are held by, and all of its operations are conducted through, SL Green Operating Partnership, L.P. (the Operating Partnership). All of the management, leasing and construction services that are provided to the properties that are wholly-owned by the company and that are provided to certain joint ventures are conducted through SL Green Management LLC which is 100% owned by the Operating Partnership.
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